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Canadian prices are trading at the widest discount to U.S. crude in four years and this time it’s not because of pipeline shortages or too much production.
The decline in Canadian crude prices has to do with less demand from the U.S. Midwest, where refineries are shutting down for maintenance or, in the case of two BP refineries, because of accidents requiring repairs, Bloomberg notes in a report.
This means that more Canadian crude is going to the Gulf coast but there it is encountering the high costs of processing heavy crude, resulting from the rally in natural gas prices. The only remaining option, then, is exporting Canadian crude from the Gulf. But it’s not the best option either, because on international markets Canadian crude meets discount Russian crude.
As a result of this competition, Canadian crude exports from the Gulf Coast fell this year, averaging some 130,000 bpd in July and August, compared with 200,000 bpd at the same time last year, data from Kpler cited by Reuters showed.
In this context, it is unsurprising that the gap between Canadian Cold Lake crude and West Texas Intermediate hit $23 per barrel yesterday before narrowing slightly to about $20 per barrel.
The dip in prices comes weeks after a Reuters report that anticipated U.S. refiners to increase their purchases of Canadian crude after the Biden administration ended the Strategic Petroleum Reserve release program.
That program, according to the report, had a lot to do with the subdued price of Western Canadian Select, which has similar properties to the crude dominating the SPR.
According to traders, demand for Canadian crude may start recovering this quarter or in the first two quarters of 2023, helped by the end of the SPR release program. However, this end might be delayed in light of the decision by OPEC+ to reduce production, which could lead to higher fuel prices in the U.S. just weeks before the midterm elections.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com