A question about Canadian crude oil prices I asked on Quora
January 3, 2015
Canada sells crude oil to the United States at a hefty price reduction. Is this discount tied to a specific price level for crude, or does the export price of crude fall at the same rate as global prices?
Respose by:
Muhammad Abduhu, Process Engineer in Training
(2 upvotes by Rod Croskery and Branden Pronk.)
At some fundamental level, Canadian oil/bitumen prices (WCS = Western Canadian Select) move up/down with WTI (West Texas Intermediate) which is an American oil price benchmark (see graph).
Source: [1]
Oil is a globally traded commodity so the world wide supply/demand picture sets bounds on the price that Canadian oil can fetch.
Other, more “local” supply/demand factors determine the differential/discount to international prices.
The size of the discount is determined by factors such as:
Heavy Oil Discount: As Branden Pronk points out, not all refineries can process Canadian bitumen so it’s not as “valuable”. Refineries need to install costly equipment to be able to turn bitumen into gasoline/diesel.
Takeaway Capacity: Refineries on the Gulf Coast/Europe/Asia can process Heavy Oil but insufficient transportation/pipeline infrastructure makes it difficult to get the oil to these refineries. The Keystone XL pipeline and moving crude by rail are some or the attempts by the industry to address this.
Location: The Canadian price is set near Edmonton, AB and excludes the cost of transport to refineries outside Alberta.
Increasing Supply: Canadian companies are bringing increasing amounts of bitumen onto the market: from 2 million bbl/d today to something like 3 million bbl/day by 2020 [2].
Competition with other heavy oil producers like Mexico [3] or Venezuela.
The WTI-WCS differential has fluctuated between $10 and $40. The average over the last few years is closer to $20 and could remain that way for a while [4].
1: Energy Prices
2: http://www.capp.ca/getdoc.aspx?D…
3: Canadian Oil Surge to U.S. Gulf Puts Mexico on Defensive
4: http://www.ogj.com/articles/2014…
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