Canadian Crude Oil Prices Back from the Brink

From 4Q2012 to 1Q2013, the Western Canadian Select (WCS) crude oil benchmark experienced historically low prices during a period when Canadian crude oil production underwent rapid growth that shows no signs of slowing (see 8 February 2013 Opinion). WCS’s struggles were caused by this influx in crude oil production and the resulting transportation bottleneck. While the building of TransCanada Corp.’s highly contested Keystone XL pipeline could provide relief to this supply glut, the project awaits U.S. regulatory approval, making it unlikely that construction will even start by 2015, according to TransCanada CEO Russ Girling. Yet recently WCS has seen a sudden reversal of fortune as its prices are rapidly converging with Bloomberg’s U.S. Sour Crude Oil Index prices, revived by drastic increases in crude oil transportation by rail. As a result, the spread between the two crudes has decreased from $59.87 per barrel in December of 2012 to $20.42 per barrel at the time of printing. A recent Bloomberg article highlighted the success of producers of Canadian heavy oil, as their stocks “have returned an average of 15 percent in the past three months… [while] an index of global oil stocks rose 7.6 percent in the same period.” Although more pipelines could still be built even if plans for Keystone XL falter, rail cars appear to be providing at least a temporary solution to the bottleneck issue surrounding Canadian crude oil. Download here