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Canadian heavy oil outlook 'has seldom (if ever) been this strong'

Cenovus, Baytex and MEG will kick off the Q2 earnings season for Canadian producers

Due to its lower quality, heavy oil like WCS trades at a discount to light sweet crudes like WTI.
Due to its lower quality, heavy oil like WCS trades at a discount to light sweet crudes like WTI. (Phototreat via Getty Images)

The price of heavy Canadian crude oil has climbed about 20 per cent in 2023, a bright spot for the major producers set to begin reporting second-quarter financial results next week.

Western Canadian Select (WCS), a heavy, sour crude that represents Canada's main export blend, is up US$15 per barrel year-to-date. Meanwhile, global benchmarks West Texas Intermediate (WTI) (CL=F) and European Brent crude (BZ=F) are virtually flat on the year.

Due to its lower quality, heavy oil such as WCS trades at a discount to light sweet crudes like WTI.

WCS hit a record discount of more than US$50 a barrel below WTI in October 2018 when a lack of space on export pipelines and refinery maintenance led to a glut of crude in Alberta. On Monday, WCS for August delivery in Hardisty, Alta. traded between US$11.85 and US$12.05 a barrel below WTI, according to the brokerage CalRock.

"It's really narrow," Rory Johnston, founder of Commodity Context, told Yahoo Finance Canada about the key differential.

While prices for light sweet crude grades WTI and Brent are most closely watched by investors, he notes these make up only a narrow portion of the overall market.

"In other words, the performance of medium and heavy grades has a material impact on the earnings of production companies and nations," Johnston said.

Next week, Cenovus Energy (CVE.TO)(CVE), Baytex Energy (BTE.TO)(BTE), and MEG Energy (MEG.TO) are set to kick off the second-quarter earnings season for Canadian producers.

"I would expect they'd be quite happy with the recent recovery in the grades they predominantly produce," Johnston said. "I'm sure you'll hear lots of stuff around new refineries starting up that are geared towards heavy and sulfurous crude oil."

In a note to clients on Sunday, RBC Capital Markets analyst Michael Tran said meetings with investors during the recent Calgary Stampede suggest overall sentiment has fallen from a year ago, with the prospects for WCS being a noteworthy exception.

"The optimism around Calgary regarding the outlook for WCS has seldom (if ever) been this strong," he wrote.

With files from Reuters

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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