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Prices for oil around the world have been stabilizing recently, but the heavy oil from Alberta, called Western Canada Select (WCS), is positively booming by comparison.
WCS accounts for most of the oil produced in Canada. It’s a thick , heavy crude that comes from Alberta’s vast fields of oil sands. The price for a barrel of this heavy oil was US$29.71 on March 17. By May 6 the price had soared more than 77 percent to $52.63.
That’s twice the rise in the price of West Texas Intermediate (WTI), the benchmark oil of its neighbor, the United States, over the same period. And it’s nearly triple the increase in the price of Brent crude from the North Sea, which serves as the benchmark oil price for the rest of the world.
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There are several reasons for this price jump, which include: a seasonal rise in demand by motorists who are driving more, especially after the harsh winter experienced in much of North America; and the fact that more Canadian oil is being delivered to refineries because of a rise in rail shipments and greater capacity in the continent’s pipelines.
The primary reason, though, is oil sands producers have made significant investments in domestic refining capacity. And that investment is paying off, at least for now.
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After the worldwide recession ended in 2009, Canada’s heavy oil cost $40 less per barrel than WTI, mostly because of the country’s small refining capacity. As a result it had to be shipped south to the United States for refining. And because the oil was so heavy, it was more expensive to refine. Together, these factors kept the price of WCS low.
But during the past few years, the North American oil industry has invested in refineries capable of accommodating heavier oil, and WCS now is easier to process, making it more valuable. The price difference between WTI and WCS has now shrunk from $40 per barrel five years ago to less than $10 today.
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Add to that an increase in the number of pipelines, which link more oil fields with more refineries, thereby maintaining a copious flow of oil. Further, many older pipelines have been upgraded, so they can now pump oil in more than one direction, helping to maintain a proper balance between the supply of oil and the demand for it.
Michael Ervin, a gasoline analyst, told CBC News that one example of how effective the pipeline investments have been is “the increased export capacity” of the Flanagan South pipeline, opened in late December, which can move heavy Canadian crude from Alberta to Cushing, Okla., North America’s oil hub and therefore the gateway for getting oil on the world market.
And that’s just one pipeline payoff. Canada’s Enbridge Inc. says its conduits are moving about 300,000 more barrels of oil per day in the current quarter than it did in the same period of 2014. Jackie Forrest, an oil analyst with ARC Financial in Calgary, gives this understated summary to CBC: “The pipelines have provided more export capacity, and that’s been helpful in pricing.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com