Canada's crude oil discount is back with a vengeance, as pipeline congestion, recent refinery fires and ever-increasing supply from the oil sands hammer prices.
Many analysts had predicted the spread or price "differential" between Canadian heavy oil and the North American benchmark West Texas intermediate (WTI) would avoid a repeat of last winter, when at one point in December Canadian oil traded at a discount of more than $42 (U.S.) a barrel.
But after holding relatively firm for much of this year, Canadian heavy oil prices have plummeted again.
December deliveries for Western Canada Select oil – a Canadian heavy oil benchmark – were trading at a discount of $41.79 a barrel on Wednesday, according to CME Group. Other types of Canadian and Bakken crudes are also seeing wider differentials.
"They're ugly," said Phil Skolnick, managing director and head of North American energy research for Canaccord Genuity Inc. "Oil can't find a home right now."
Discounts on Canadian heavy oil weigh on the financial performance of the energy sector, since they mean oil sands producers generate reduced revenue. Because Canadian heavy oil is of lower quality than light oil and moves greater distances to get to key markets, it typically trades at a lower price.
But last winter, the significantly wider-than-normal differential became a hotly debated political issue.
The Alberta government coined it the "bitumen bubble" as it struggled to manage the province's resource-dependent finances. The Canadian Chamber of Commerce said that differentials for Canadian crude last winter meant lost revenue of up to $50-million a day for the industry. The Bank of Canada said real gross domestic product growth was restrained by the oil price differentials.
Amid the pipeline congestion last year, oil producers scrambled to push for more high-volume pipelines and rail transportation from Western Canada to key markets, such as the U.S. Gulf Coast, to help get better prices for Canadian crude.
This time, however, here are some unusual circumstances at play. For instance, a fire at Citgo Petroleum Corp's 174,500 barrel-a-day refinery in Lemont, Ill. last month has led to further crude supply backups and added to pressure on prices. There was a separate fire over the weekend at the 130,000-barrel-a-day Co-op refinery in Regina, which also processes heavy oil, according to Reuters.
Mr. Skolnick noted that, at the same time, Cenovus Energy Inc., Suncor Energy Inc. and Imperial Oil's Kearl site are all ramping up oil sands production. Winter also typically sees higher differentials as refineries shut down operations for maintenance.
The issue was raised in pipeline giant Enbridge Inc.'s third-quarter earnings conference call on Wednesday, when company officials noted they were forced to ration space on congested pipelines this month.
"Heavy crude doesn't always have a good home," said Enbridge's Stephen Wuori, who heads liquids pipelines and major projects. "That's why you've seen the differentials rise … especially in the last couple of weeks. There was a fire at one of the refineries in Chicago that has taken down their ability to take heavy crude."
Mr. Wuori said BP's upgraded 405,000-barrel-a-day Whiting refinery will open up more demand for Canadian heavy oil when it reaches full production in 2014. Enbridge's Flanagan South pipeline project, which will come on stream in mid-2014, will also provide a new high-volume pathway for heavy crude down to the Gulf Coast.
Mr. Skolnick, too, believes the wide differential is temporary. Besides the new pipelines, refineries will be repaired after fires, and new facilities to transport oil by rail are also ramping up.
"Last year at this time was a lot worse when you looked out six months, 12 months. … There was not really much hope of improvement," he said. "This time, you look out four, six, 12 months from today, things look a whole lot better."