Canadian oil producers are facing steep discounts to world prices as their sole export market in the U.S. western states is swamped with a growing glut of crude.
Canadian select heavy crude was selling for $31.25 (U.S.) a barrel below the benchmark West Texas intermediate, nearly double the spread of a month ago. At the same time, WTI – which sets the trend for Canadian prices – is selling at a steep discount to international traded crude like North Sea Brent.
Oil exports from Western Canada are essentially limited to the so-called mid-continent market – the Great Lakes and Great Plains regions – which has limited refining capacity to absorb growing production from the oil sands and from North Dakota's prolific Bakken field.
Unscheduled outages at two refineries in the Midwest drove Canadian prices steeply lower this week, with Canadian synthetic crude selling for $20 (U.S.) a barrel below WTI. But the temporary problems underscored the vulnerability of Canadian producers.
"It's not a Canadian export pipeline issue; it's more of a U.S. congestion issue that's come up," said Martin King, an analyst at First Energy Capital in Calgary.
"On a logistical basis, it points to the vulnerability of having all our eggs in one basket as a nation. It makes more sense to diversify your customer base for crude oil."
Mr. King said most producers won't be greatly affected by the temporary price drop, which he expects to ease in the coming weeks. But if the differential remains for longer than that, companies will see a material impact on their revenues.
The industry has plans to extend its reach to the massive refining hub on the U.S. Gulf Coast through TransCanada Corp.'s proposed Keystone XL pipeline, and to secure access to Asian markets through Enbridge Inc.'s Northern Gateway pipeline through British Columbia.
However, the Keystone XL line is stalled as TransCanada reroutes the line around an environmentally sensitive area of Nebraska, and Republicans in Congress attempt to force an approval from a reluctant U.S. President Barack Obama. The Northern Gateway, meanwhile, faces a contentious 18-month regulatory review and perhaps years of legal battles from first nations and environmentalists who oppose it.
While Canadian crudes have fallen in price against West Texas intermediate, the U.S. benchmark has itself suffered against global crudes as a result of frigid weather in Europe and a logjam at Cushing, Okla., where the WTI price is set.
The differential between WTI and Brent has widened to nearly $20 (U.S.) – levels last seen last fall. Both trendsetting crudes rose in price on Wednesday, amid further tensions over Iran, the second-largest oil exporter in the Organization of Petroleum Exporting Countries.
The lack of pipeline capacity from Cushing to the Gulf Coast "is killing the Canadians and it's killing those guys in North Dakota, too," analyst Jim Williams said, referring to the producers in the state's booming Bakken play.
Mr. Williams, of WTRG Economics, said the widening spread between Brent and WTI could ease somewhat later this year, when Enbridge and its partner, Enterprise Products Partners, begin shipping 150,000 barrels a day of crude from Cushing to Houston via the Seaway pipeline.
Last fall, Enbridge bought a 50-per-cent stake in the little-utilized Seaway line, which had been used to transport crude from Texas to Cushing, and are reversing it to gain access to the refineries on the Gulf Coast. The reconfigured line is expected to be commissioned in June, and then expanded to ship as much as 375,000 barrels a day.
HORIZON PLANT SHUTS FOR REPAIRS
Canadian Natural Resources Ltd.'s [[entity]]anadian Natural Resources Ltd.'s [[/entity]]NQ-T Horizon oil sands plant in northern Alberta has been shut for unplanned repairs, the company said on Tuesday, pushing up North American oil prices and pressuring the company's shares.
The country's biggest independent oil explorer gave few details of the outage, but a source familiar with the situation said the 110,000-barrel-a-day plant could be offline for two to three weeks.
The shutdown came as price discounts for the synthetic oil wrung from the Canadian oil sands had been deepening to record levels owing to booming industry-wide supplies as well as tight pipeline space. The Horizon news briefly narrowed that spread.
It also contributed to a $3 (U.S.) spike in benchmark West Texas intermediate prices and helped narrow its differential with Brent crude to $18 a barrel from a three-month low under $20. WTI settled up $1.50 a barrel at $98.41 on Tuesday.
Shares in Canadian Natural, whose Horizon oil sands project was idle for seven months last year owing to a devastating fire, fell 4.4 per cent on the Toronto Stock Exchange.
The company said in a brief e-mail that it was not making any changes to its annual production targets as a result of the outage at Horizon. It has forecast oil sands production of 105,000 to 115,000 barrels a day for 2012, and overall oil and gas liquids output of 464,000 to 504,000 barrels a day.
The work at the plant follows weekend maintenance at the site, the source said.