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The Investment Case For Floating LNG

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Sky-high natural gas prices have…

Deloitte: WCS-WTI Oil Price Gap Could Ease In 2018

The wide discounts to which Canadian oil benchmarks are priced to WTI could diminish later this year as increased refinery capacity on both sides of the border would give more outlets to Canadian producers, consulting firm Deloitte said in a forecast on Tuesday.

Transportation bottlenecks since the end of last year have blown out the price differential between Western Canadian Select (WCS) and WTI, and at the end of last year WCS traded at a discount of US$30 to WTI as the transportation capacity was unable to keep up with rising production from new oil sands projects sanctioned before the downturn.

At the end of Q1 2018, additional storage capacity in Alberta and data about fewer crude-by-rail shipments added to concerns of a domestic oil glut, as TransCanada’s Keystone Pipeline has yet to return to normal pressure levels following a leak and temporary shutdown last November.

“WTI (West Texas Intermediate) crude prices pulled away from Canadian crude prices in the quarter as supply in Canada exceeded pipeline capacity, causing transportation issues north of the border,” Deloitte said in its forecast on Tuesday, as carried by Calgary Herald.

Currently, WCS trades at around US$27 discount to WTI.

But according to the consultancy, the gap could start to narrow later this year, as the Sturgeon refinery northeast of Edmonton is nearing completion, and U.S. refinery capacity is rising. Keeping full crude pipeline operations would also play a role in narrowing the discount, Deloitte says.

For Edmonton Light, the discount jumped to US$7.32 per barrel in January, after averaging US$3.93 in Q4 2017, the consultancy said, adding that this discount is expected to narrow to around US$3.50 by 2019.

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“The announcement by the Government of Alberta to support partial refinery upgrading in the province by 2019 might help to alleviate WCS (Western Canadian Select) price volatility, as producers would have additional domestic options to sell heavy crude oil,” said Deloitte.

Other analysts, however, expect transportation problems to persist, weighing on the price of WCS.

The Enbridge, Kinder Morgan, and TransCanada pipeline projects have yet to be approved, and “as it stands now, no new pipeline capacity will begin operating until at least early 2020,” RBN Energy said last month.

The wide WCS-WTI discount is unlikely to improve much any time soon, because the cushion of in-region storage and crude-by-rail (CBR) shipments “seems uncomfortably thin” due to an expected increase in heavy oil production this year and next, RBN Energy said.

By Tsvetana Paraskova for Oilprice.com

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