Canadian crude oil hit the highest price level in more than a year on growth in oil-by-rail shipments, Bloomberg reports based on data about price movements for the commodity it had compiled.
As a result of the increase in oil-by-rail shipments, Canada’s benchmark Western Canadian Select yesterday traded at a discount of only US$10.50 to West Texas Intermediate. This compares to more than US$50 a barrel in mid-2018.
It’s worth noting the shrinking discount of WCS to WTI does not fit in with the growing amount of Canadian heavy being moved to refineries in the United States by rail. As Bloomberg’s Robert Tuttle explains, the current discount is too narrow to cover the costs of oil-by-rail shipments to U.S. refiners. In fact, it’s too narrow to cover the costs of shipping some of the oil by pipeline, too.
Yet rail shipments are set to continue growing as pipelines are working at capacity and no new ones are coming. But some familiar with the industry argue that moving Canadian heavy crude by rail is not as expensive as it may seem: unlike the crude that flows via pipelines, bitumen doesn’t have to be diluted—which also costs money—to be loaded on train cars. This line of argument could explain the rise in oil-by-rail shipments as could the fact there are simply no other options for Canadian producers.
According to data from Genscape cited by Bloomberg, Canadian oil producers exported some 281,000 barrels of crude daily by rail in the last week of December, which compared to an average of 263,000 bpd for November. Producers, Genscape analyst Mike Walls told Bloomberg, also closed several long-term oil-by-rail delivery contracts late last year, which means these shipments will continue strong even after production cuts enforced by the Alberta government at the end of last year begin to make a dent in supply.
By Irina Slav for Oilprice.com
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