Canadian Oil Crisis Continues As Prices Plunge

Authored by Nick Cunningham via Oilprice.com,

Canadian oil producers are once again suffering from a steep discount for their oil, causing the largest spread between Canadian oil and WTI in years.

Western Canada Select (WCS) recently fell below $40 per barrel, dropping to as low as $38 per barrel on Tuesday. That put it roughly $31 per barrel below WTI, the largest discountsince 2013.

The sharp decline in WCS prices is a reflection of a shortage of pipeline capacity. Much of the talk about pipeline bottlenecks these days focuses on the Permian basin, and the unfolding slowdown in shale drilling, which could curtail U.S. oil production growth. But Canada’s oil industry was contending with an inability to build new pipeline infrastructure long before Texas shale drillers.

However, the problem has grown more acute over the last 12 months. Even as pipeline takeaway capacity hasn’t budged, Canadian oil production continues to rise. Output could jump by around 230,000 barrels per day (bpd) in 2018, followed by another 265,000-bpd increase in 2019, according to the International Energy Agency.

(Click to enlarge)

As more supply comes online, the pipelines are filling up, and there is little relief in sight. Until Enbridge’s Line 3 replacement is completed – targeted for late 2019 – midstream capacity won’t expand. Enbridge recently received a crucial permit from the state of Minnesota, through which the pipeline will traverse, even though state regulators questioned the need for the pipeline. Environmental groups and Native American tribes affected by the pipeline have vowed to mount a resistance to the replacement and construction of the Line 3, echoing the protests of the Dakota Access Pipeline from two years ago.


“They're bringing highly toxic, highly poisonous tar sands oil directly through major watersheds and the last standing reserve of wild rice that the Ojibwe have to harvest,” Bill Paulson, a member of the Ojibwe tribe, told CNN last month. “Our culture is the wild rice and gathering and being out in the woods. If there's a threat to that, then there's a direct threat to the people.”


It is unclear how this will play out, but the opposition could delay the project beyond the expected start date. That means that the discount for WCS will stick around.


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