Price Relief Near for Canada's Producers

Canadian crude differentials look stuck. Benchmark Western Canadian Select (WCS) trades some $25 below US marker West Texas Intermediate (WTI), and both market chatter and forward curves suggest that spread will persist until late this year. To be sure, production outages and other acute issues might cause differentials to gyrate, but the current spread seems structural. One major factor pressuring WCS is familiar — the imbalance between supply and pipeline takeaway capacity. While pipeline egress is not as constrained as it was for much of the last decade, space remains tight. This can weigh on crude in several ways, from inventories building at upstream pricing points to prompting a shift to more expensive logistics assets such as rail. The Keystone pipeline system, which operated at some 610,000 barrels per day last year, is currently running at a reduced rate following a leak in December. The line initially shut down entirely, and its return to service brought WCS’ discount back to pre-leak levels, but the spread has remained there since. Meanwhile, the largest market for Canadian crude is facing its own headwinds. The US midcontinent’s downstream consumes some 2.6 million b/d of Canadian crude, accounting for over 70% of the total flow. But following a fire late last year, BP’s Toledo refinery, which typically runs some 86,000 b/d of Canadian oil, is not operating. And recent severe winter weather has contributed to downstream outages; per government data, midcontinent utilization dropped from 95% at the start of December to a trough of 79.2% the week ended Dec. 30 and remains below 85%.