Pipeline constraints hurt Canadian crude prices

CALGARY (Bloomberg) -- Canadian crude plunged to a record low relative to U.S. crude, hurt by reduced capacity at American refineries and a jump in production from new oil-sands megaprojects that has overwhelmed the nation’s pipeline system.

Maintenance work at U.S. refineries over the next six months will lead to stretches when those facilities are offline, giving portions of Canadian heavy crude nowhere to go, Andrew Botterill, a partner at Deloitte in Calgary, said in a report Thursday. That dynamic, along with increased output from newly finished projects like Suncor Energy’s Fort Hills mine and improved efficiency at existing operations, is already at play, he said.

“We’re already starting to see it,” Botterill said. “The volatility that we’ve seen in the last three months, I totally expect to see more of it in the next three months. I fully expect this kind of volatility in 2019 as well.”

Western Canada Select’s discount to U.S. crude sank to $43.25/bbl on Thursday, the widest on record in Bloomberg data stretching back to 2008.

Canadian crude production recently surpassed available pipeline space, and even with the country’s producers signing contracts to move more crude by train, Canada doesn’t have enough rail capacity to alleviate the transportation bottlenecks, Botterill said. The country will need more pipelines and more domestic refining capacity to clear the glut, and those could take years to develop, he said.

Oil-sands producers are getting less than 40% of Brent crude price

“I hate to imagine something even worse than what we’re seeing right now,” Botterill said in an interview. “But we’re going to see more days of these $40 differentials."