Canadian heavy-oil prices traded at their widest discount to U.S. crude in four years on Wednesday, pressured by rising supplies and hefty restrictions on major pipelines.
Prices for Western Canada select, the blend of conventional heavy oil and bitumen from Alberta's oil sands, have lurched into an extended funk as a series of big-ticket expansions in the sector are dumping more barrels into a market already struggling with export constraints.
On Wednesday, West Texas intermediate oil closed at $65.61 (U.S.), while WCS barrels for March delivery changed hands for roughly $38.11, a discount of $27.50 against the benchmark WTI, according to oil broker Net Energy Inc.
The darkening price outlook for the Canadian blend is a sharp contrast with improving sentiment in much of the global oil industry. It marks a setback for capital-intensive oil sands producers, many of whom had looked set to emerge from a bruising slump. A stronger Canadian dollar has added to the strain. Tight export capacity has plagued the sector for years.
But oil producers that had hoped to ship increasing supplies by train as pipelines fill up are finding that option is not readily available, said Mike Walls, analyst at data firm Genscape Inc.
In a sign of caution, Canadian Pacific Railway Ltd. last week indicated it would take a more conservative approach to shipping crude than it did in the past.
Companies "are realizing now that rail really isn't going to be available until probably the second half of 2018," Mr. Walls said.
"People assumed that rail would be able to pick up the slack and it would be able to pick up the slack as soon as the pipes filled up, and that's just not come to fruition."
Prices for Alberta's superthick oil – which trades at a discount because it must be shipped over long distances to refineries and because it requires more processing to turn into gasoline and diesel – slumped after Enbridge Inc. said it would curtail deliveries on a major Alberta-to-Wisconsin pipeline next month. The company, Canada's dominant oil shipper, said it would nearly halve nominations for space on its Line 67 pipeline.
The hefty reductions added to restrictions in place on TransCanada Corp.'s Keystone system, imposed by U.S. regulators following a spill on the line last November. Keystone ships about 590,000 barrels a day at full capacity.
The sharp deterioration in Canadian prices has weighed heavily on shares of energy producers, some of whom are also grappling with a weak outlook for natural gas. Since mid-December, the TSX energy subgroup of companies has climbed roughly 9.4 per cent, lagging the 15-per-cent gain in WTI prices.
Big setbacks for the sector include weak natural-gas prices, delays to major pipelines and the widening price gap between Canadian heavy crude and WTI, known as the differential, said Robert Mark, portfolio manager at Raymond James Ltd. in Toronto.
There is "tons of stuff out there to scare investors away from Canadian energy," he said. But momentum could return later this year, he said, especially for companies with less exposure to heavy crude.
"Our view is that there will be a catch-up trade in 2018," he said. "I suspect it will start with [first-quarter] results and gain traction from there as improved cash flow and earnings numbers should be hard to ignore."