Canadian oil producers are once again suffering from a steep discount for their oil, causing the largest spread between Canadian oil and Western Texas Intermediate in years.
As a result, Western Canada Select (WCS) recently fell below $40 per barrel, dropping to as low as $38 per barrel last week, which puts it roughly $31 below WTI, the largest discount price since 2013.
Canada has the world’s third largest oil reserves after Venezuela and Saudi Arabia. The sharp decline in WCS prices is a reflection of a so-called shortage of pipeline capacity.
Much of the talk about pipeline bottlenecks these days focuses on the Permian basin, and the unfolding slowdown in shale drilling, which could curtail U.S. oil production growth.
But Canada’s oil industry was contending with an inability to build new pipeline infrastructure long before Texas shale drillers.
However, according to the International Energy Agency, Canadian oil production continues to rise. Output could jump by around 230,000 barrels per day (bpd) in 2018, followed by another 265,000-bpd increase in 2019.
As more supply comes online, the pipelines are filling up, and there is little relief in sight. Until Enbridge’s Line 3 replacement is completed – targeted for late 2019 – midstream capacity won’t expand.
Environmental groups and Native American tribes affected by the pipeline have vowed to mount a resistance to the replacement and construction of the Line 3, echoing the protests of the Dakota Access Pipeline from two years ago.
Bill Paulson, a member of the Ojibwe tribe, told CNN last month, they’re bringing highly toxic, highly poisonous tar sands oil directly through major watersheds and the last standing reserve of wild rice that the Ojibwe have to harvest.
Shipping oil by rail to the US Gulf Coast can cost as much as $20 per barrel or more, according to Scotiabank, double the rate for shipping by pipeline. But with the WCS discount as large as it is, the economics could still work out.
However, rail companies have been hesitant to invest in new rail capacity for transporting oil, especially if the business opportunity of doing so only lasts for another two or three years.
Still, crude-by-rail shipments have climbed significantly this year, hitting a record high 198,788 barrels per day in May, the latest month for which data is available.
However, even if rail economics look attractive, the lack of sufficient capacity means that rail won’t be able to entirely bridge the gap.
RT.com / ABC Flash Point Shale Oil News 2018.