Skip to main content

Western Canadian oil producers have seen prices improve dramatically since crisis levels of the fall, but analysts warn the gap with the U.S. benchmark will likely widen again as many shippers increasingly rely on more expensive rail to transport their oil to market.

Western Canadian Select (WCS) traded on Tuesday at US$40.78 a barrel, just US$9 less than West Texas Intermediate (WTI), according to Bloomberg. The closely watched price differential between the Canadian heavy oil benchmark and West Texas crude widened to more than US$50 in October – driving heavy oil prices below US$10 at their low point – as some major American refining customers shut down for maintenance while increasing production in Alberta outpaced the capacity to move it out of the province by pipeline and rail.

Alberta Premier Rachel Notley ordered a production cut of 350,000 barrels a day to take effect on Jan. 1. The biggest producers say they are complying with that order, while some complain that it is hitting them harder than the advertised average cut.

That action, along with the return of the U.S. refiners, lit a fire under Western Canadian crude prices. Producers of light oil and synthetic crude upgraded from bitumen have also seen a rebound in prices after they were hit with steep discounts this fall. Synthetic crude traded on Tuesday on par with WTI after trailing it by as much as US$20 a barrel in the fall, according to NetEnergy Exchange, a Calgary-based trader.

But the spread between WCS and WTI is likely to widen again as the market adjusts to the production cuts and the industry continues to rely on rail to get supply to markets. Reliance on rail can add as much as US$10 a barrel to the cost of transporting crude compared with pipelines, thereby reducing the oil price by that amount.

Producers will have to rely on rail to some extent, "and that will be the prevailing economics,” said Andrew Botterill, a partner with Deloitte LLP’s resources advisory group in Calgary, “We do see it is going to be a bumpy first quarter and the differential is going to be wider than it is today.”

Deloitte on Tuesday released its forecast for the Canadian energy sector. It sees WCS averaging US$38 a barrel this year, US$20 less than its forecast for WTI.

Economist Jackie Forrest at ARC Energy Research Institute agreed the current tight spread between WCS and WTI is not sustainable. She said the differential would have to be between US$18 and US$20 a barrel to cover rail transportation.

In addition to the production cut, Ms. Notley announced in late November that the provincial government will purchase some 7,000 rail cars and locomotives needed to ship an additional 120,000 barrels a day by rail. Her spokeswoman, Cheryl Oates, said Tuesday that the government is still negotiating to secure the cars. It will likely take months before that additional export capacity is available.

Meanwhile, the five oil sands majors are bearing the biggest impact of the supply cuts. Those five companies – Suncor Energy Inc., Canadian Natural Resources Ltd., Cenovus Energy Inc., Imperial Oil Ltd. and Husky Energy Corp. – account for 85 per cent of Alberta’s oil production. Cenovus and CNRL supported the provincial move, while the other three companies – which have refining operations that benefit from low crude prices – opposed it.

Suncor said this week it posted record production in the final three months of 2018, with 831,000 barrels a day (b/d), or 12 per cent higher than in the third quarter. With the production cut that is scheduled to be phased down over 2019, it expects to produce between 780,000 b/d and 820,000 b/d.

Husky said Tuesday that it will have to reduce production by far more than the industry average owing to government’s exemption for the smallest producers. As well, the company saw substantial supply growth at the end of 2018, but said it is required to cut from its previous lower output. “The amount of production we will have to curtail in Alberta in January is more than double the 8.7-per-cent headline number the province has announced,” Husky spokesman Mel Duvall said.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe