CALGARY – Steep discounts in prices for western Canadian heavy oil are moderating and should gradually ease through 2018 to allow Canadian producers to reap bigger rewards from strengthening world oil prices, according to GMP FirstEnergy.
A spike in the difference between Western Canadian Select crude prices and benchmark U.S. prices was made worse by volume constraints on the Keystone pipeline system between Alberta and the U.S. Gulf Coast following a leak in South Dakota in November, said analyst Martin King in a presentation in Calgary on Tuesday.
He said the transportation blockage meant growing volumes from Alberta’s oilsands couldn’t easily get to market, driving prices lower for the bitumen blend at the same time that New York-traded West Texas Intermediate was climbing to three-year highs above US$64 per barrel.
King said crude-by-rail terminals in Western Canada have been using a small part of their one million barrels per day of capacity but are now activating idle capacity to fill the gap, with the main constraints being availability of locomotives and conductors.
“Over the next couple of years, I could see a lot of that capacity being used up for railing, hopefully just in time for new pipelines to come into service in 2020,” he said.
“I think those differentials will (shrink) another US$5 to US$7.”
He predicted the Canadian crude discount will fall from US$17.30 per barrel in the fourth quarter of 2017 to average US$16 in the current quarter and US$13 in the third quarter of this year.
Rail transport is more expensive than pipeline but the shipper has the advantage of sending his crude to the market where it will fetch the best price.
On Tuesday, Calgary intermediate producer Obsidian Energy Ltd. (TSX:OBE) announced that it will begin shipping some of its northwestern Alberta heavy oil by rail in the next few weeks to try to get better prices.
It estimated that rail transport will cut the price discount it is receiving by about half.
In a report on Monday, ATB Financial said Western Canadian Select has averaged about US$36 per barrel so far this year, about 11 per cent lower than in the last three months of 2017.
It also concluded that growing use of crude-by-rail will help ease the price discount towards the end of the first quarter of 2018.
In its latest report, the National Energy Board said crude-by-rail exports from Canada rose to above 136,000 barrels per day in October, about one-third higher than in the same month of 2016.
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