The lowered exports of OPEC heavy crude grades to North America are tightening the price spread between WTI and Western Canadian Select (WCS), cutting into the refining margins of U.S. refiners and at the same time helping Canadian oil sands producers sell their heavy oil at a higher price, Fitch Ratings said in a release this week.
OPEC has been mostly cutting heavy grades since the start of the production curbs. After the cartel extended the cuts into March next year and after it saw that oil prices continue to be depressed due to the persisting glut, OPEC is now deliberately targeting lower supplies to the U.S. to draw down the stockpiles, which the industry and market monitor most closely for signs of where the global demand/supply is going.
OPEC’s biggest exporter and de facto leader, Saudi Arabia, has pledged to cut its total August exports to 6.6 million bpd, which would be a nearly 1-million-bpd drop in total Saudi exports compared to the export level last year.
The decreased heavy oil supply in the U.S. has caused the WTI-WCS spread to drop from historical averages in the US$15 per-barrel range to an average of US$9.80 per barrel in the second quarter this year, Fitch has estimated. The narrower spread is eating into the refining margins of many U.S. Gulf Coast refiners such as Valero Energy, Citgo, and Phillips 66, which typically benefit from a wide WTI-WCS spread, the rating agency reckons.
On the other hand, oil companies focused on Canada’s oil sands, including Cenovus Energy and MEG, benefited from the narrower spread in Q2 and their realized sales were higher because of the lower discount of the WCS compared to WTI, Fitch Ratings said.
Lower global supply of medium and heavy grades from OPEC, as well as from Latin America—where production in some countries is falling due to ageing fields while Venezuela is in shambles—is raising demand for Canadian heavy oil as it is an easy substitute.
According to Fitch, the very tight light-heavy crude price spreads are unlikely to persist over the long term, in view of new projects coming online in Canada that would increase oil sands output. However, there is one possible event that would likely tighten the spread even more—a U.S. ban on imports of Venezuelan crude oil, Fitch noted.
By Tsvetana Paraskova for Oilprice.com
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