Strong OPEC compliance a “hidden windfall” for Canadian heavy oil producers
Strong OPEC compliance a “hidden windfall” for Canadian heavy oil producers: Raymond James
By Deborah Jaremko
March 1, 2017, 5:59 p.m.
U.S. Gulf Coast refineries are looking to process more Canadian heavy oil barrels as supplies drop from OPEC countries, analysts at Raymond James said in a research note issued on Wednesday.
The price spread between Canadian heavy benchmark WCS and Gulf Coast heavy benchmark Mexican Maya has narrowed since OPEC’s agreement to cut production, from about US$10/bbl in November 2016 to about US$6/bbl today.
“With the differential between Maya and WCS now below transport costs to the Gulf Coast, our suspicion is that the pullback of heavy oil supplies from OPEC members is resulting in U.S. refineries bidding up Canadian heavy oil barrels in response, leading to the tightening [in the differential],” Raymond James said.
Typically, OPEC countries tend to focus their production cuts on heavier grades, the analysts note, adding that this is a logical approach to maximizing revenue given the lower prices these streams receive. This is in addition to ongoing production declines in heavy oil-focused OPEC countries like Venezuela and Mexico.
While the situation may be positive for Canadian heavy oil producers, Raymond James notes that the tighter spread will put increased pressure on heavy-focused U.S. refining margins and presents downside risk to refinery utilization.