Explainer: Under pressure: What's weighing on Canadian heavy crude?

Athabasca Oil

10/11/2022 12:00

By Nia Williams
       Nov 10 (Reuters) - Canada's benchmark heavy crude,
Western Canada Select (WCS), is trading at a steep discount to
West Texas Intermediate (WTI) after weakening sharply last
month, and is expected to remain subdued well into next year.
    WHY IS WCS UNDER PRESSURE?
    WCS for delivery at the Hardisty, Alberta, hub is trading
close to $30 a barrel under WTI, having averaged $16.67 a barrel
below WTI for the first three quarters of 2022.
    A number of factors are to blame.
    For much of 2022, the United States has been releasing
barrels from its Strategic Petroleum Reserve (SPR) to combat
high oil prices. The release of millions of barrels of
predominantly sour crude has left the U.S. Gulf Coast, home to
the world's largest heavy oil refining centre, awash in crude of
similar quality to WCS.  urn:newsml:reuters.com:*:nL1N2XU1P2
    In September, BP-Husky Toledo, Ohio, refinery operated by BP
Plc  BP.L , which processes up to 90,000 barrels per day (bpd)
of heavy crude, shut following a fatal fire. 
    The Canadian oil market was slow to react to the Toledo
outage, according to a Calgary-based industry source, and as
other U.S. refineries went into scheduled turnarounds cutting
demand further, WCS-WTI differentials collapsed.
    Other factors weighing on WCS include competition from cheap
Russian crude on the global market and high natural gas prices
that made refining heavy oil more expensive.
    Meanwhile, output in Alberta, home of the oil sands and
Canada's largest crude-producing province, hit a record 3.88
million barrels per day in September, up 9.6% from the same
period a year earlier, according to ATB Financial.
    HOW DOES THIS COMPARE TO PREVIOUS BLOWOUTS?
    WCS hit a record discount of more than $50 a barrel below
WTI in October 2018 when a lack of space on export pipelines and
refinery maintenance led to a glut of crude in Alberta. 
    However, unlike previous WCS blowouts, the current deep
discount is led by weak downstream demand, rather than pipeline
bottlenecks. Since Enbridge Inc's  ENB.TO  Line 3 replacement
project started operating last year, Canada's export capacity
has been broadly in line with production.
    WHO IS MOST AFFECTED?
    Pure-play heavy oil producers without refining capacity are
most impacted by weak WCS prices. These include MEG Energy
 MEG.TO  and Athabasca Oil  ATH.TO , according to RBC Capital
Markets.
    WHAT NEXT?
    A number of industry analysts and company CEOs, including
Cenovus Energy CEO Alex Pourbaix, say they expect a deep WCS
discount to persist throughout the first half of 2023.
    The U.S. SPR releases are due to wind up at year-end, but
upheaval in the global crude market due to Russia's invasion of
Ukraine is clouding the outlook for WCS.
    "I can't say it's very bullish as long as Russia is still
being Russia," one broker said.
 (Reporting by Nia Williams; Editing by David Gregorio)
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters
Messaging: nia.williams.thomsonreuters.com@reuters.net))