Shrinking Canadian Oil Discount May Widen Again as Glut Persists

(Bloomberg) -- Canadian heavy oil’s discount to U.S. crude -- which shrank to the smallest in more than a year on Monday -- may widen again in 2019 as the reality sets in that Alberta’s oil-transportation woes are far from solved.

While Western Canadian Select prices have surged since mid November, helped by a provincial plan to curtail 325,000 barrels of daily output, trading has been thin and doesn’t reflect the fundamentals of the physical market, said Andrew Botterill, a partner in Deloitte’s resource evaluation & advisory group in Calgary. Those fundamentals include pipeline bottlenecks and 35 million barrels of oil in storage, he said.

WCS may retreat to $38 in 2019, while U.S. benchmark West Texas Intermediate may rise to $58 a barrel this year, implying a $20 differential, Botterill said in a note published Tuesday. That would be more than twice the $9.75 the discount notched on Monday.

“We are still in an oversupply, and we do have a lot of volumes that are currently sitting in storage, and Canada as a whole has to get through that,” Botterill said in an interview. “So that does mean that there’s going to be some discounting, and it’s going to be a really tough first half of the year.”

In the second half, Canadian prices may benefit from a ramp-up in rail capacity, which should add 120,000 barrels of daily offtake by 2020, he said. Enbridge Inc.’s Line 3 expansion should be online in the second half of the year, adding 370,000 barrels of new capacity, he said.

Helping take the edge off of the turbulence may be increased demand from U.S. Gulf Coast refineries, which are looking to replace shrinking supplies from Mexico and Venezuela, he said.

“We’re seeing declining volumes from both of those jurisdictions,” Botterill said. “The first natural place that’s going to pick that up is going to be Canadian heavies as long as the U.S. refineries continue with the slate that they’ve been doing for so long.”

To contact the reporter on this story: Kevin Orland in Calgary at korland@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Joe Carroll, Reg Gale

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