Canadian Heavy Oil Stays Home as U.S. Tanks Fill Up
(Bloomberg) -- Canadian oil sands producers no longer have an incentive to send their crude toward the Gulf Coast as a glut grows in the U.S. due to the coronavirus pandemic.
Western Canadian Select for May delivery in Alberta was 50 cents more expensive on Tuesday than it was at the U.S. oil storage hub of Cushing, Oklahoma, according to NE2 Group prices.
In normal times, the further one gets away from Northern Alberta the higher the price. So oil companies gain from shipping the crude to U.S. refineries. But these aren’t normal times. With Americans sheltering at home, demand for gasoline and jet fuel is cratering. Last week, U.S. inventories gained 15 million barrels to the highest level since May 2017.
While Canada is also facing storage constraints, there are indications the situation is more critical in the U.S. In a sign that little to no storage is left at the Cushing storage hub, West Texas Intermediate futures for May delivery fell to a negative $40 a barrel on Monday, a day before expiration. Anybody holding contracts would have had to take delivery at the storage hub.
“Basically, I think that the signal from the market this week in Cushing is hold the front page, no room at the inn,” Sandy Fielden, director of oil and products research at Morningstar, said by telephone. “Don’t send anything down here.”
On the U.S. Gulf Coast, oil is coming from domestic shale producers in West Texas as well as imports that come by tanker. The rising supply prompted pipeline operator Enterprise Interstate Crude LLC to seek permission to send oil north on a pipeline that normally ships oil south, reversing a decade-long trend to expand southbound capacity.
In contrast, Western Canada oil inventories declined slightly in March, according to Genscape. Alberta oil sands producers, including ConocoPhillips and Suncor Energy Inc., have ramped down massive oil sands production wells and mines amid the collapse in demand.
Western Canadian crude output could fall by about 900,000 barrels a day from 1Q to 2Q 2020, Clearview Energy Partners said in a report today. That’s about a fifth of the country’s total output.
©2020 Bloomberg L.P.