Canadian heavy crude, being deeply discounted for several years due to a lack of pipelines, is eventually trading like a “North American” grade, moving in tandem with U.S. sour crudes sold on the Gulf Coast thanks to Enbridge's expansion of its Line 3 pipeline late last year.
Meanwhile, the Gulf is full of sour crude over Washington's largest-ever release from the Strategic Petroleum Reserve (SPR) that will amount to 180 MMbbl during six months, trying to tame exorbitant fuel prices after the start of the conflict in Ukraine.
The market is flooded with millions of barrels of sour crude from storage caverns in Louisiana and Texas. At the world's biggest heavy crude refining center, U.S. Gulf Coast, heavy grades like Mars and Poseidon are languishing.
The discount in July for Western Canada Select (WCS) delivery in the Hardisty crude hub reached more than $20 a barrel below the WTI benchmark last week, the widest since early 2020, as WCS sold more than 3,000 km (nearly 2,000 miles) away in Hardisty, Alberta, is getting dragged down with them.
However, the undermining of the sour Gulf surplus is expected to be a period of stronger WCS demand in Hardisty, as maintenance on oil sands projects decreases supply and as U.S. refineries exit turnarounds.
Some analysts suppose that other factors resulting in the WCS discount widening include the high price of natural gas, which escalates the cost of refining heavy crude and risen demand for lighter products like gasoline.
According to U.S. Energy Information Administration (EIA) data, Canada exports around 4.3 MMbbl/d to the United States, whereas until last year demand to ship crude on export pipelines increased capacity, leaving barrels bottlenecked in Hardisty.
In 2018, the discount on WCS in Hardisty blew out to more than $40 a barrel, prompting the Alberta government to restrict output. Meanwhile, now there is sufficient pipeline capacity and WCS trades at approximately the same level as comparable crudes like Mexico's Maya. Canadian producers get that value, minus the spot pipeline tariff to the U.S. Gulf Coast, which is roughly $10 a barrel.
The EIA forecasts that Canadian production will increase 200,000 bbl/d by the end of 2022. Unfortunately, that could trigger bottlenecks to re-emerge until the Trans Mountain pipeline expansion to Canada's Pacific coast is completed in 2023, adding 600,000 bbl/d of capacity.
