Canadian crude likely to be priced in U.S.

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For Canadian energy companies, the race to move oil to the Gulf Coast has taken on elements of a grail quest. There, on the shores of Louisiana and Texas, lie massive refineries with an appetite for the heavy oil pouring out of Alberta. All the industry has to do is find a way to get oil there, and maybe get the Keystone XL pipeline built in the process.

But those who examine oil prices say those connections will be made – and the Gulf Coast is set to take on huge importance for Canada, as Alberta heavy crude finds its way down rail lines and new rail paths south.

In fact, a key oil price-reporting organizations believes Canadian heavy oil prices will one be set thousands of kilometres from the oil sands.

"Once all the de-bottlenecking of Canadian production is done, once you've got XL running, we think that the marginal price for Canadian heavy is going to be set at the Gulf Coast," said Euan Craik, chief executive of Argus Americas, which reports on the prices of a number of important energy products. Mr. Craik spoke at a recent Canoil conference in Calgary.

"We think that a robust spot index for WCS [Western Canadian Select, the key heavy blend] is going to emerge quite quickly, and possibly for Cold Lake as well," he said. Cold Lake is another important heavy crude.

That could portend substantial improvements for Canadian producers, since heavy oil on the Gulf Coast has, in recent months, sold far above WCS, which has traditionally been priced at Hardisty, the Alberta crude nexus 175 kilometres south-east of Edmonton. On Monday, Maya blend traded for nearly $23 more than WCS, even though the two have similar specifications. In recent months, the gap has approached nearly $40.

Those prices are likely to grow closer as the two markets are connected.

The expectation that Canadian heavy oil will be priced in the U.S. comes amid what Mr. Craik called "a really dramatic realignment of trade flows in North America." Much of it is due to remarkable speed with which new Alberta, North Dakota and Texas barrels have found their way onto the market.

Already, LLS – Louisiana Light Sweet – has become "probably a better representation of real value" in North American oil. He said. And while West Texas Intermediate remains the most highly-traded oil type, and the benchmark for the continent's prices, LLS is now present "in almost every physical crude contract in the Gulf Coast region" as well as in oil sales in Texas, North Dakota and even Illinois.

Those changes come as North American crude increasingly pushes out substantial volumes of foreign product.

"Maritime imports into the U.S. Gulf Coast and the U.S. East Coast have declined by more than 1.2-million barrels per day in a year," said Mr. Craik. "That's just quite a phenomenal change."

(Nathan VanderKlippe is a Globe and Mail Energy Reporter.)

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