The discount on Canadian crude widened to its highest level in nearly a year after a major oil spill forced the shutdown of the Keystone pipeline, a key conduit for energy exports to U.S. markets.
Pipeline operator TC Energy Corp. has not given a timeline for a return to service of Keystone, which ruptured and leaked an estimated 1.5 million litres of crude oil in North Dakota last week.
The outage helped drag Alberta crude prices down to about US$34 a barrel as of Monday, compared with US$56.54 for West Texas Intermediate, the U.S. benchmark for oil.
The last time the gap between the two was that wide was last December, at the tail end of a crash in Canadian oil prices caused by a shortage of pipeline capacity.
“Canadian crude differentials can temporarily blow out again, until either rail responds or Keystone returns,” Michael Tran, a commodity strategist at RBC Dominion Securities, wrote in a report.
“The next week to 10 days will be a white knuckle ride.”
The Keystone pipeline, which originates in Hardisty, Alta., is one of the primary ways of moving heavy oil sands crude destined for American refineries. TC Energy is also proposing to build the US$8-billion Keystone XL pipeline linking Alberta to the Gulf Coast.
Shipments on the existing line account for up to 18 per cent of Canada’s oil exports to the United States. Additional rail capacity may be able to handle close to half of the lost pipeline capacity.
But there are no easy alternatives to transporting the 590,000 barrels a day that Keystone can accommodate. And each day that Keystone is out of service will commit additional stranded Canadian crude barrels to inventories.
Most pipeline ruptures are repaired and service resumed within a week or two. If that’s the case this time around, the sector can probably manage the additional stockpiles.
But there is little room for error, Mr. Tran said.
Much longer than that and excess supply could overtake storage capacity, which in the past has put extreme downward pressure on prices for Alberta oil. Last year, Western Canadian Select, or WCS, sank to as low as US$13.46 a barrel as excess supplies piled up.
The cause of the North Dakota leak and the duration of the outage, let alone the environmental toll, are not yet known.
And this is not Keystone’s first major spill. In 2017, a rupture leaked 6,600 barrels in rural South Dakota.
“At some point, the regulators are going to get really annoyed, and they may want to take action,” said Samir Kayande, a director at RS Energy Group.
If Keystone is offline for a sustained period for whatever reason, the capacity to move oil by rail will be put to the test, Mr. Kayande added.
“The other option could be deeper curtailment, because there is now precedent for the government managing production and we know that works.”
In 2018, mandatory production cuts were put in place in Alberta to help ease the pipeline bottleneck. That move is widely credited with helping balance out the Canadian oil market and reduce the pricing differential to normal levels.
Last week, the Alberta government announced plans to ease those production restrictions. A measure set to take effect in December would allow producers to exceed their quotas if they can move those barrels by rail.
A prolonged Keystone outage could force a reconsideration of the curtailment guidelines, Mr. Kayande said.
The spill is the latest setback for a sector under extraordinary pressure, as it contends with weak global pricing over growth concerns, environmental scrutiny related to climate change, the exodus of investment capital and the lack of takeaway capacity amid a factious national pipeline debate.
“This outage underscores the structural issue plaguing the Canadian oil industry, whose fortunes are consistently one pipeline leak away from a materially wider WCS differential,” Mr. Tran said.