North America's crude-price advantage has evaporated with the plunging oil market, undermining a key rationale for new pipelines to Canada's coasts – that they would deliver low-cost crude to eastern refiners and premium pricing from offshore markets for Alberta producers.
For several years, West Texas Intermediate has sold at a significant discount to the global benchmark, North Sea Brent, as a result of booming production in North America and a U.S. export ban that kept the crude bottled up in the continent.
That differential prompted pipeline companies to tout the benefits of cheaper western oil for eastern refineries when they unveiled projects like Enbridge Inc.'s Line 9 reversal and TransCanada Corp.'s Energy East. Canadian oil producers also expected to export into higher-priced international markets when their crude reached tide water through projects like Energy East and Enbridge's Northern Gateway.
That price benefit has now virtually disappeared. Western Canadian producers will still need access to new markets if they are to grow over the longer term. But the collapse in the Brent-WTI differential represents a fundamental realignment in the global oil market as producers continue to pump out more crude than the world needs and drive down prices.
Given the weaker European economy and lack of storage options, Brent prices have fallen faster than North American crude, relative to the peaks of last summer. Last June, Brent was trading $8 (U.S.) above WTI.
In markets Tuesday, the international benchmark briefly traded below WTI, hitting a low of $45.19 a barrel, before recovering to $46.59 while the North American crude settled at $45.89, down 18 cents on the day.
The narrowing differential "reflects much weaker oil demand in Europe relative to the U.S.," said Michael Lynch, president of Boston-area Strategic Energy and Economic Research Inc.
There has been an expansion of pipeline capacity from the storage hub in Cushing, Okla. – where WTI is priced – to Gulf Coast refineries, thereby reducing the mid-continent bottleneck and draining the excessive inventories that had previously built up in Cushing. At the same time, U.S. has added considerable capacity for storing crude, while Europeans are forced to look at more expensive options, including the use of supertankers to store inventories of crude.
"One has lots of storage and it's cheap – ie. Cushing," said Amrita Sen, oil analyst at London-based Energy Aspect LLC. "The other has none and is using floating storage."
In the case of Brent, some the world's biggest traders booked supertankers to store at least 25 million barrels at sea in recent days, Reuters reported. Traders store crude in hopes of selling it at a higher price later.
Most analysts still expect a significant gap between Brent and WTI. In a research note earlier this week, Goldman Sachs said it expects the spread to narrow from an average of $10 in an earlier forecast to $3.25 a barrel for 2015 and $5 in 2016.
But the Republican-led U.S. Congress is pushing to loosen – or even eliminate – the 40-year export ban on U.S. oil, a move which would further integrate North American and international markets.