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CALGARY and TORONTO and OTTAWA — Price discounts on western Canada’s heavy oil have narrowed dramatically, as producers move record amounts of crude by rail in order to sidestep pipeline bottlenecks and reach thirsty U.S. refineries.
The price spread between Western Canadian Select and the North American benchmark is at its narrowest in more than a year, after shrinking rapidly in the last month. WCS sold for about $78 (U.S.) a barrel late last week, about $15 a barrel less than West Texas intermediate oil. That differential had reached nearly $35 in January.
The shrinking spread gives a reprieve to energy companies producing heavy oil in western Canada.
Those companies, which include global giants and small producers, have been hammered by the steep discount, leaving some to trim their budgets and pull back on expansion plans. The reduced differential is also welcome news for the government of Alberta, which is facing its sixth deficit in a row due in part to the price gap weighing on royalty revenue.
In the first 12 weeks of 2013, the number of carloads of petroleum products shipped by U.S. and Canadian railways was up 47 per cent from its year-ago level, according to National Bank Financial’s chief economist and strategist Stéfane Marion.
“Rail pipelines,” he said in a research note Monday, “now account for more than 5 per cent of total rail traffic in Canada, a tenfold increase from just three years ago.”
Analysts at Peters & Co. Ltd. project that crude oil transported by rail from Western Canada is expected to exceed 250,000 barrels a day by the end of 2013.
“The recent tightening in Canadian crude differentials is being assisted by the fact that material volumes are now being transported to market by rail,” the firm said Monday. “The use of rail is allowing for another outlet or market clearing mechanism other than pipeline.”
Meanwhile, railways are ramping up their crude capacity. “We see it as a sustainable, long-term growth market for our railroad,” said spokesman Ed Greenberg of Canadian Pacific Railway Ltd., noting that the company anticipates moving 70,000 carloads of crude by rail this year, up from 53,000 in 2012.
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