Western Canadian Oil – Why the Price Gap?
WTI & WCS Differential
Canadian Oil Price Gap
In addition to the WTI and Brent Differential is oil prices, there are several other differential price gaps affecting the Canadian market.
Click here for more detailed information on differentials on the FNR Asset Management website.
One of these differentials is the price of Western Canadian Select (WCS) in comparison to WTI. WCS is the most prevalent Canadian oil benchmark (WTI is the North American benchmark), and is a blend of conventional oil, bitumen and synthetics. It is heavier and more difficult to process than both WTI and Brent, thus it has a higher refining cost.
Source: The Bank of Canada
The price differential between WCS and WTI is due in part to the higher refining cost, as well as the over-supply of oil at Cushing, Oklahoma due to transportation and pipeline issues. Because of the added transportation and refining costs to WCS, the profit margin a refiner can earn from using WCS priced oil is less than they would get from WTI. Thus, refiners are paying Canadian producers less per barrel as a result.
To further complicate matters, oil refineries in Eastern Canada import Brent crude to their facilities, which is higher than both the WTI and Western Canadian Select prices.The Bank of Canada warns that the net effect of lower Canadian crude prices is a decrease in the oil-related terms of trade because the price being received for barrels produced in Canada is significantly lower than what is paid for barrels going into the eastern refineries. About 50 per cent of the gasoline in Canada is produced from Brent-price crude. If the refineries continue to input more costly crude oil, than higher gasoline prices for consumers are inevitable.
The issue also affects the Canadian GDP, as Canada exports almost three million barrels of oil per day. The oil price spread has at times been in excess of $30 per barrel in recent months, which equates to $90 million in lost revenue for the oil patch daily.
Solutions to the differential issue include increasing pipeline capacity through pipeline expansions and reversals, as well as building additional Canadian refineries. As demand for oil overseas increases, particularly in Asia, pipeline expansions across Canada to B.C. (where oil ships to Asia) are also proposed.
Stay tuned for additional information and factors affecting the Western Canada and Saskatchewan oil industry from FNR Asset Management.
Article Sources:Calgary Herald Financial Post The Bank of Canada CBC Business News