Prices paid for western Canadian oil are “collapsing” as bottlenecks in producers’ ability to deliver crude to American market hubs force them to swallow the biggest discount to benchmark U.S. supplies in nearly four years.
Tar sands/oil sands producers are at “a serious pain point,” Bloomberg writes, as absolute prices for their product fell to US$30.64 a barrel, their lowest in a year, last week.
The main reason is that the discount applied to Canadian supplies more than doubled between August and this month, from $10.01 per barrel four months ago “to $26.50 a barrel, the weakest level since December 2013,” Bloomberg calculates.
The price discount reflects the cost of shipping oil by either pipeline or rail from western Canada to distribution hubs in the American Midwest. Lately, producers have been expanding their output, straining the limits of either transportation mode, forcing pipeline and rail companies to ration service, and driving up the price of available space.
Some of the shipping squeeze is a consequence of producers’ decisions to expand production. “Suncor Energy Inc.’s Fort Hills mine, for example, is starting up now and scheduled to reach 20,000 to 40,000 barrels a day by next quarter,” the U.S. business news agency notes.
But the two Canadian pipeline companies shipping crude south have also both experienced unusual capacity restraints. TransCanada Corporation’s Keystone pipeline was forced to close for two weeks after a spill in South Dakota, and allowed to resume only limited operation. Its rival, Enbridge, has been rationing space on its feeder network.
The alternative of shipping oil to market by rail is more expensive than by pipeline—further steepening the discount—when it is available. Bloomberg reports that Canadian National Railways, the primary carrier, has also been forced to ration space.
Tar sands/oil sands producers “are in a serious pain point right now,” said Mike Walls, a Genscape Inc. analyst. “It’s the perfect storm of too much supply and not enough capacity.”