In the past, Canadian heavy oil was too often the sick man in the US oil market. Affected by a limited number of refinery outlets and numerous episodes of insufficient pipeline export capacity from western Canada, it was often subject to much larger price discounts compared to the light crude benchmark price of West Texas Intermediate (WTI) than was warranted by quality and pipeline. only transport costs. In recent years, however, improved pipeline export capacity to and through the US has expanded the number of refineries Canadian heavy oil can reach, and the expansion of oil export terminals crude along the Gulf Coast has resulted in better exposure to Canadian barrels. to buyers in international markets. The end result has been a closer alignment of Canadian heavy oil prices in its Alberta base with those in the Midwest and Gulf Coast.
The machinations of Western Canadian Select (WCS), the price benchmark for the region’s heavy oil production, remain a hot topic for the crude oil market and readers of the RBN blog. With more than 90% of Canada’s crude oil exports to the United States being high-intensity, and usually tied to the WCS benchmark in some way, the price drivers of this closely watched price marker have affected billions of dollars in investment decisions from the production to the refining side of the business. They also generated an overt political response a few years ago in Alberta, home to the vast majority of western Canada’s heavy oil production in the form of tar sands bitumen.
The key with the WCS price is that due to the characteristics of Canadian heavy oil (low API, high sulphur, etc.), you would expect it to trade at a discount to the lighter crude oil. In the case of WCS, it is usually expressed as a discount to WTI to account for the additional costs associated with transporting the heavy oil to other parts of North America and processing it, as well as other extraneous factors ranging from regional inventory levels, the availability of pipeline export capacity, the price of competing heavy oil supplies, and refinery demand (or lack thereof), just to name a few. For maximum value to be realized, Canadian heavy oil producers prefer a narrower price differential than WTI that more accurately reflects differences in quality and transportation, rather than wider discounts where other factors beyond quality and transportation could reduce the value of heavy oil further.
