WTI-Brent Spread Costing Canadian Producers Over $1 Billion a Month

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

As Canadians are becoming all too aware, the spectre of a recession, no matter the definition, looms large during an election campaign. Despite such prominence, the recent debate made it abundantly clear that none of the candidates understand why the economy stopped growing in the first half of the year and they have even less [...]

Read More...

WTI-Brent Spread Costing Canadian Producers Over $1 Billion a Month

Posted by Jeff Rubin on November 10th, 2011 under SmallerWorldTags: crack spread, oil, WTI • 12 Comments

Facing growing political and environmental opposition in the U.S. to the proposed Keystone XL pipeline, Canada’s landlocked options for exporting its oil have never appeared more costly.

Not only has deadheaded oil in Cushing Oklahoma, the present terminus of the pipeline, put a crimp on expansion plans in the oil sands, but the ballooning price spread between West Texas Intermediate (WTI) and world oil prices has cost Canadian producers more than $1-billion a month in lost petro-dollars.

It’s not U.S. motorists pocketing the difference at the pumps. Midwest refineries have been quick to recognize a gift horse when it is staring them in the face.

The only thing bigger than the gap in oil prices between Cushing (where WTI is priced) and the Gulf Coast is the gap in refinery margins. Refinery margins, or crack spreads as they are known in the oil industry, refer to the price difference between what refineries pay for their feedstock (crude or bitumen) and the price they charge for the products they, in turn, sell such as gasoline or diesel.

While refineries in Cushing pay WTI prices for their feedstock, refineries 400 miles south pay about $20 per barrel more for Light Louisiana Sweet, which like all fuels heading into U.S. ports, trades at or near the Brent-based world oil price. Incidentally, those prices have been in triple digit territory since the beginning of the year.

That is a great deal for the refineries in Cushing that get a crack spread of around $25, compared to a spread of about $5 for those that have to pay Brent-type world oil prices for their fuel.

But for Canada’s oil patch, which exports more than two million barrels a day to the U.S., the $20 or more price discount that has prevailed all year amounts to $40 million a day, or about one and a quarter billion dollars a month in lost petro-dollars.

I bet shareholders of Canadian oil producers, not to mention provincial and federal governments in Canada, would like to see their share of the rich crack spread that mid-western refineries are getting on their Canadian feedstock.

Without pipeline access to the Gulf, or to the Pacific to supply Chinese customers, Canadian oil producers get what Mid-west refineries will give them. And that’s a huge discount to what the rest of the world will pay, including U.S. refineries along the Pacific, Atlantic or Gulf coasts.

It doesn’t make sense for Canadian oil to flow to the market that values it the least. If Canadian oil exporters can’t get to world prices through the proposed Keystone XL pipeline to the Gulf of Mexico, they must find another route for their oil to flow.

John

Nothing particularly new here. What I want to know is, why does not the export link to the Pacific get built without delay? Why not a crash programme to get that link built? If the loss to Canada is of the order of magnitude that you indicate there is no good argument for delay. Unless, I suppose, one believes the oil will be worth dramatically more in real terms in the future than it is today.

Yet an outlet to the Pacific would raise the price paid at Cushing to the world price, would it not? Thus there is a huge amount of present value being forgone that will be tough to recapture in the future.

Is there a hidden agenda here somewhere? ! !

JKJ
Jonatan252000

The increased profits for US refineries coming from the buying of Alberta tar sand oil is simply a discrete methodology for covering part of the cost of the ”protection” that the US is providing to Canada…

JB
http://pulse.yahoo.com/_EU4PCOXIGPWWEBE2ENIFTXS54Y John

What about finally creating some value-added industry to Canada in the form of refineries in Alta,BC or even Manitoba where gas/diesel/petrochems can be sold overseas or anywhere…???
Why do we never hear about any Canadian refinery proposals for our oilsands? Upgraders only, so it can flow in the pipes but not the next logical step, refining? Its being proven that there is significant margins and the growth potential.
Anonymous

Hi Jeff,
With Keystone XL delayed until at least post US election, and likely similar resistance to a pipeline to the BC coast, maybe its time we really consider a pipeline to eastern Canada. Its my understanding that at least some of the oil we consume in eastern Canada is imported. If so, it is likely imported at the higher Brent crude prices.
Maybe we should move oil within Canada for self suffieciency and independence. Maybe we should prevent a problem with supply from overseas, if that’s where it comes from, before it occurs rather than waiting for the problem to shock us into action. Same applies if the imported oil originates in the US. If they have a shock, might they hesitate to export to us?
Pipelines to both coasts open doors to European and Asian markets. Let the Americans dither about us sending them more. It is definitely time we get world prices for our resources. That includes from our friends, the Americans.
Jim in Victoria
Abitibi Doug

Why don’t we hear more about the much shorter pipeline, from Cushing to Houston, proposed by Enbridge?
lillolme

Jeff, now your getting it! Next… look at the pipelines flowing northward from the US Gulf Coast (at greatly reduced capacity). Yes, northward from the GOM to Cushing and Illinois. Hint: look-up Seaway and Capline. Check out ownership. While you are at it, maybe check out major refiners south of Chicago (listed & private).
Let’s see…. a glut of crude in Cushing with rising Canadian production and two major pipelines still flowing (~250 kbbl/d out of ~1550 kbbl/d capacity) crude into the region…. and a $35 NYMEX crack spread…. ramping up from when Keystone started flowing into Cushing?
How many spectacular price trips up & down has WTI had in the past 4 months?
Hey, it’s just lillolme asking questions here….
After that, maybe look at crude grades and which refineries around the globe can process 20~22 API crudes like Maya and Bachaquero or other grades similar to WCS once waterborne. Maybe even calculate the Maya-Lloydminster or Maya-Cold Lake spreads.
Why would anyone consider using anything other than WTI spreads? lol. Could your $1 billion per month need revision? Nah… can’t be.
You seem to have already chosen the blue pill. Already too late for the red one.
As for “flow to the market that values it the least”…. oh, they value it all right.
Just asking questions,
lillolme
lillolme

Sorry Jeff. Got my pill colurs mixed up. Correction: I think you have already taken the RED pill. lillolme

“You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.” -Morpheus
Dassa0069

Something like Kuwait horizontal drilling into Iraqi fields?
Unc

Jeff,now lets see here now,20 or so a day for the spread, in my mind that could go a long way towards involving First nations people, with a decent stake in a super safe redundant transport system to the west coast, key is to get their input and ideas regarding sensitive areas in their traditional territories, there are ways of doing this, such as double wall pipe, 24 hr First nation observance patrols and automatic shut down valves along with volume accumulators in areas of consensus . More costly, yes initially,but we could lead the way in the developement of a state of the art, new wave , Hydrocarbon transport system including coastal transport thru to deep water Pacific shipping lanes, this is acheivable, but it will have to be based on a consensus from all the players and I aint talkin about southern funded enviro groups with their own ,separate agenda,s. Let the markets dictate the ways and means,nothing worse than having all yer eggs in one basket. Unc fsj Canada.
Abitibi Doug

It does seem odd that a pipeline to eastern Canada hasn’t been considered more seriously. In the time being, would it be cost effective to move crude oil from Alberta to the east by rail? How about a pipeline to Thunder Bay, then moving it on ships? If we absolutely must develop the Alberta oil sands further, then it would make sense to use more of this oil in our own country.
Unc

JK John-ee , the big elephant has not lost all his weight,we are still the mouse in the ring,a lot of Folks down yonder, make nice clams off our captive situation,if one digs further into the bag of hammers,one would find that the proponents of captive energy and in north america, donate copious quanities of cash to keep it that way.Opponents of our countries ability to diversifiy, are being funded covertly, by the good ol boys, they like things-just the way they are. There is no reason in this world why we can not export – hydro-carbons from the west -coast of Canada-Safely ,to other markets that are willing to pay world market price.I am afraid we are gonna have to get-WESTERN and make er happen,this after all is supposed to be a global -trading world, that is why we as Canada sighned off on the wto statutes. Our cousins yonder will always get their grits,we like takin care of family,but when they is getting kinda hoggi,it kinda bugs us and make no mistake,we got good grits. besides, ifin they was real good cousins,why is they bin running a soft wood lumber war with us for the last 132-years,what is them good old boys skeert of-Competition ? Unc fsj
patroclus1

That protection is going to shareholders of private concerns and not the US tax payers. Quite a racket I’d say. IMHO Canada would be best served by a pipeline to either of her coasts.

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

WTI-Brent Spread Costing Canadian Producers Over $1 Billion a Month