The stars are not lining up in favour of Canadian heavy oil in the next couple years due to pipeline constraints and over supply.
The price differential between Canadian heavy oil and West Texas Intermediate (WTI) grew to more than $25 a barrel last week, as producers struggle to get excess oil to market.
Heavy oil fetched about $32 a barrel for Western Canadian Select last Friday.
Genscape Inc., a commodity and energy data firm says that crude oil inventories in storage in Western Canada have hit record levels.
There’s more than 31 million barrels in storage, up from less than 3 million a year ago.
Michael Loewen, a strategist for Scotiabank told BNN last Friday that the glut is partly due to the two-week shutdown of TransCanada Corp’s Keystone pipeline last month due to a spill.
He said that’s led to a massive discount on Canadian heavy oil because producers can’t get a decent price for their oil, and he warns that could follow through well in 2019 as more supply hits the market.
Loewen said Albertans can’t seem to catch a break with new oilsands production from Horizons and Fort Hills in northern Alberta coming on line soon with all of the available pipeline capacity accounted for.
He said if you can’t get oil to the market due to bottlenecks, then you’ve disconnected from the market. That means the economics within Alberta will be different globally.
Other heavy oil grades globally haven’t dropped nearly to the same amount as the Western Canadian Select price has.
Loewen said because of that transportation bottleneck, Albertans are really feeling the pinch.
Canadian railroads, already struggling to fulfill commitments to ship other commodities aren’t able to help ease the oil glut, but it is profitable for them to try.
The volume of Canadian crude oil exports surpassed 134,100 barrels per day in September, the latest stats from the National Energy Board.
Loewen said producers can also get more money by shipping oil to Cushing, Oklahoma (oil trading hub) by rail than by selling it on the cash market in Alberta.
He said it’s good for rail, but it’s much more expensive than normally shipping oil by pipeline.
He noted the economics are compelling for both right now, but producers just can’t get their barrels to market.
Loewen expects oil from Fort Hills and Horizons will add more than 300,000 bbls a day to Alberta’s current output by 2019, plus another 100,000 bbls/d of new production from smaller projects.
That’s a 10 per cent increase from Alberta’s current production levels of about 4 million barrels a day.
Loewen says the Enbridge Line 3 will restore 375,000 bbls a day of incremental capacity to Superior Wis. and the new Sturgeon refinery in Alberta will increase internal demand for oil when it comes on line.
The game changer, however; said Loewen that will save the Alberta marketplace, is the construction of the Kinder Morgan TransMountain pipeline or the Keystone XL pipeline.
Loewen said he prefers TransMountain over Keystone XL.
He said that’s a big deal for Alberta because it means heavy oil producers can access tidewater, and compete against global heavy prices.
He said if they can access tidewater they will have substantially higher prices and not be beholden to WTI prices.
He said the oil storage was the cushion for Alberta, but the Keystone spill outage took that away.
As a result, he said U.S. refineries are having a field day with cheap Canadian oil.