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‘Darkest days’: Canadian crude plunges against U.S. benchmark

Steam rises from the Syncrude Canada Ltd. upgrader plant in this aerial photograph taken above the Athabasca oil sands near Fort McMurray, Alberta, Canada, on Monday, Sept. 10, 2018. Photographer: Ben Nelms/Bloomberg via Getty Images

The price of Western Canadian Select (WCS) crude dropped more than US$55 per barrel below North American benchmark West Texas Intermediate on Friday. The widening discount is evidence the commodity may be in its “darkest days,” according to one industry analyst.

Dan McTeague, senior petroleum analyst at GasBuddy.com, points to a confluence of factors including U.S. refinery outages and issues with Enbridge Inc.’s (ENB.TO) plan to replace its aging Line 3 pipeline. However, he says none are more pressing than the lack of new takeaway capacity to relieve the growing crude glut in Western Canada.

Even basket-case Venezuela can get $67 for it’s heavy oil. We’re lucky to get $15. That should be a national disgrace,” he told Yahoo Canada Finance on Friday. “We’re in this situation primarily because we have allowed ourselves to find our capacity boxed in with no viable short-term, reasonable solutions.”

WCS, Canada’s main grade of crude, has seen a dramatic decline in recent months, plunging below $16 a barrel. Meanwhile, WTI prices rallied to a recent peak above $76 earlier this month, before retreating to about $71.

Auspice Capital’s Canadian Crude Oil ETF (CCX.TO), which tracks the company’s Canadian Crude Index, has plunged more than 40 per cent since mid-May.  

“Canadian producers across the spectrum are not benefiting from higher global prices,” Capital Economics senior Canada economist Stephen Brown wrote in a research note on Friday. “If the capacity constraints that have caused the discounts to widen are sustained, it would clearly be bad news for energy investment.”

McTeague blames Prime Minister Justin Trudeau’s Liberal government and “environmental activism” for delaying pathways for Canadian oil to reach overseas export markets.

“Activism is now starting to hurt the Canadian economy in ways that people are not imagining. Traditionally, WCS has always stayed within about $15 a barrel to WTI,” he said. “It’s causing a flight of capital investment in Canada.”

The Federal Court of Appeal ruled in August that the National Energy Board (NEB) review of the Trans Mountain pipeline expansion was too flawed for the federal government to base its decision on. The court cited  a lack of consultation with Indigenous groups and inadequate marine impact assessment.

The $7.4-billion project, formerly owned by Kinder Morgan Canada (KMI), will be run as a crown corporation until a new owner can be secured.

Twinning the existing 1,150-kilometre pipeline between Edmonton and Burnaby, B.C. would increase its capacity from 300,000 barrels per day to 890,000 barrels per day, according to Kinder Morgan.

Last month, Natural Resources Minister Amarjeet Sohi announced that the NEB will have 22 weeks to re-examine the project.

“These might be the darkest days for WCS,” McTeague said. “But one pipeline, one opening that takes us to any one of the oceans on either cost of the country would see WCS restore itself to within $10 to $15 dollars of WTI.”

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