Western Canadian Select is trading at US$17.28 this very moment. For comparison, West Texas is around US$70, and Brent is US$80.
It is well known that Canadian Western crude has a heavy price discount due to the inability to transport it to market. Line 3 (ENB), Keystone (TRP) and Trans-Mountain (KMI/KML, now the Government of Canada) are the only three “quick and cheap” ways to getting it out and these lines are already full.
However, this discount has been much more pronounced over the past quarter and if it continues, it will be financially catastrophic to those companies that are over leveraged and have covenant issues.
The question is to what degree this is reflected in current Canadian oil asset prices. The solvency situation for a lot of companies are likely to get worse than better in the near-term.
It is also amazing how political considerations can stall an entire industry. The survivors will be the well-capitalized incumbents that will pick away strategically at assets of those which are forced to liquidate. Suncor, CNQ and the like with independent channels for energy distribution will pick away at the entrails of smaller, less capitalized competitors.
What I am trying to say here is that small-cap oil, especially those over-leveraged, look to be an incredible value trap on the equity side. There may be debt opportunities here and there, however.
It’s a dramatic discount. I wonder to what extent oil producers have been ramping up production recently without the available extra pipeline capacity to carry it? Maybe these are past investments that are coming on line now? If so it seems like a precarious position to be in if an overzealous competitor can flood the market and crash the price. Another question is who is capturing the spread. Is it the pipeline companies?
The rail companies are for sure. Regulated pipelines have to go through a very bureaucratic mechanism in Canada, somewhat analogous to the FERC with regards to pipeline pricing. (https://www.neb-one.gc.ca/bts/whwr/rspnsblt/trffctlltrff-eng.html#s5 is a good start). They can’t just one day say we’re going to be charging you $20/barrel to transport the stuff.
Don’t you think a large portion of the current discount can be attributed to the large amount of refining capacity that is offline right now for maintenance?
I think it’s almost a million barrels of demand and significantly higher than the last few years. Most of that is supposed to be back online within a month. From what I have read, we should be in balance totally by Q4 next year after the Enbridge line 3 replacement is complete. Then the expected growth is expected to take us back into deficit in 2020 until either expansion projects are complete.
Safety is right, an unusually large amount of refinery capacity is off-line currently for maintenance. But it’s also true that Alberta has continued to produce more oil year after year. Production has roughly doubled in the previous ten years. We seem to be over-producing both pipeline capacity and refinery capacity. Does this make sense? I would guess that it is the refineries that are capturing the largest part of the spread. Could there be some collusion going on? Could refineries in the US be coordinating their maintenance shutdowns deliberately to crush the price of Canadian oil?
[…] $20 per barrel, while the benchmark price for crude in North America is well over $60 per barrel? Divestor explains why the spread exists and why the situation is very bad news for investing in the […]