As the global price of crude flirts with $100 (U.S.) a barrel, a flood of Canadian imports into the United States is suppressing North American oil prices and renewing calls for Canada to capitalize on surging demand abroad.
Oil prices are climbing across the board, but diverging by region. The benchmark North American crude, West Texas Intermediate (WTI), is trading at a near-record discount to the leading international crude, North Sea Brent.
That has created a windfall for some producers, like Calgary-based Nexen Inc., that sell significant volumes of overseas crude, and has shielded consumers in the United States and Canada from some of the dramatic prices increases seen in Europe.
But it has also raised important strategic questions for the Alberta-based industry, which relies on oil exports to the U.S. market even as global demand increasingly shifts to fast-growing countries such as China and India.
Analysts say the WTI-Brent differential could widen with the continuing increase of Canadian imports into Cushing, Okla., a major trading hub where West Texas Intermediate crude is deemed to be delivered in the futures markets that set prices.
"The increased production from Canada is definitely a factor in keeping oil away from $100 a barrel," said Phil Flynn, Chicago-based analyst at PFGBest, a futures trading firm. "If you are using more of the heavier [Canadian]crudes, you are going to be using less WTI, so it definitely has an impact in keeping our prices down and our supplies more ample," he said.
WTI and Brent prices began to diverge in early December and continued to widen Wednesday. In trading on the New York Mercantile Exchange on Wednesday, the price for WTI crude for March delivery fell 50 cents to $91.81 per barrel, while in London markets, Brent climbed 36 cents to $98.16 per barrel.
Brent - which sets the benchmark for a host of international crude prices - is being driven higher by a number of factors: production problems in the North Sea, a frigid winter in northern Europe and a growing appetite among investors who see it as more closely linked to stronger demand growth in emerging markets such as China.
In a report this week, the International Energy Agency said the West Texas Intermediate price structure is "collapsing" due to burgeoning inventories and rising Canadian imports. The agency noted that the WTI discount to Brent climbed from an average of $1.13 per barrel in November to $6.35 on Wednesday.
With stocks already bulging at Cushing, TransCanada Corp. is set to open the taps on its new Keystone pipeline project, which extends its delivery of Western Canadian crude into the Oklahoma hub.
With 1.9 million barrels in daily exports to the U.S., a $6-a-barrel price discount delivers a substantial hit to Canada's economy as a whole. That has strengthened the argument among some who believe Alberta crude needs to be able to find another market.
"Most of the growth in world demand for crude oil is going to be in emerging Asia - China, India and the rest of southeast Asia," said Patricia Mohr, a vice-president and commodities market specialist at Bank of Nova Scotia. "And that's why I've always thought we should build the Northern Gateway pipeline, for shipment of Canadian oil sands out to markets in Asia."
The Northern Gateway pipeline, proposed by Enbridge Inc., would deliver some 500,000 barrels of oil sands crude daily to Kitimat, B.C., for shipment to Pacific Rim markets. That project, which is now being reviewed by the National Energy Board, is facing considerable opposition from first nations communities in its path, and from environmentalists.
But producers are also looking to break out of the Cushing bottleneck by gaining access to the U.S. Gulf Coast, which is the continent's largest refining hub.
Enbridge Inc. has reopened plans for its Monarch pipeline, which would take 150,000 barrels per day from Cushing to the Gulf Coast. It could eventually be expanded to 350,000 barrels per day. Enbridge expects to decide by June whether there is enough industry demand to restart that project, which had been stalled.
Its competitor, TransCanada Corp., is awaiting an environmental permit from the U.S. State Department, which has authority over international pipelines, for a project that would deliver 500,000 barrels per day from Cushing to the Houston area.
TransCanada is also finalizing discussions toward building "Cushing Marketlink," a shorter stretch of pipe that will bring 150,000 barrels per day from Cushing to the Texas coast near Louisiana.