The outlook for Canada’s oil sands is pretty grim, but it just got hit with an unexpected blow.
An outage at a Midwest refinery could lead to deeper discounts for Canadian oil for several months. BP’s Whiting refinery in Indiana was forced offline for unexpected repairs. Without going into too much detail, BP said that it “shut down the largest of its three crude distillation units for unscheduled repair work.” It also said that production has been cut back at the refinery, which has the capacity to process 413,000 barrels per day, or 19 million gallons of refined fuel each day. Related: Chevron’s Mishap Highlights Risk of Deepwater Drilling
The disruption of the Indiana-based Whiting refinery could lead to a spike in gasoline prices in the Midwest as the region suddenly encounters shortages of fuel supplies. Gas prices in Chicago are above $3 per gallon, while the national average is $2.61.
The impacts could reverberate beyond the Midwest. The surprise disruption is bad news for oil prices as well, as a major source of crude demand has suddenly been taken offline. This comes at a time when other refineries will conduct maintenance and switch off summer fuel blends. The end of peak driving season will also cut into fuel demand heading into autumn. Related: Japan’s Nuclear Restart Could Spell Disaster For Commodities Markets
Moreover, without the demand pull of a major refinery, crude oil will have to be rerouted to storage. Much of that could end up being diverted down to Cushing, Oklahoma, a key oil storage hub. For much of 2015, energy analysts have watched U.S. oil storage levels, looking for evidence for when the worldwide glut of supplies could ease. After several months of inventory drawdowns, the shuttering of the Whiting refinery could lead to a reversal, with stocks building back up.
If Whiting remains offline and the oil is sent to Cushing, storage levels at Cushing could fill up in a matter of months. The prospect of such a dramatic development has already pushed down oil prices. Related: Saudi Oil Strategy: Brilliant Or Suicide?
The Whiting refinery also sources a lot of the oil it processes from Canada, and its outage is another blow to Canada’s oil patch, which is already suffering from having to heavily discount its oil compared to WTI. Western Canada Select, a benchmark for heavy Canadian crude, dropped to just $23 per barrel, well below WTI’s $43. As the FT notes, at those levels, some of Canada’s oil companies are barely breaking even, while others are even losing money on the oil they are producing.
By Charles Kennedy of Oilprice.com
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