Heavy Canadian Crude Seen Within $10 of WTI as Demand Picks Up

Western Canadian Select crude’s discount to West Texas Intermediate is poised to narrow to less than $10 a barrel for the first time in two years as new pipelines supply record volumes of the heavy oil to refiners.

The heavy oil grade’s discount to the U.S. benchmark narrowed 5 cents to $12.50 a barrel at 1:56 p.m. Mountain time, the smallest since Feb. 2, according to data compiled by Bloomberg. So far this year, the discount has traded at its narrowest since 2010 on a seasonal basis. New pipelines and rail capacity have increased Canadian exports to the U.S. as refiners ramp up operations after maintenance and before the summer driving season.

A discount of less than $10 is “well within the possibility,” Bart Malek, analyst at TD Securities in Toronto. said in a phone interview. U.S. refineries need heavy crude and it’s “less and less likely we will get supply bottlenecks.”

The U.S. imported a record of 3.21 million barrels a day of crude from Canada in January with 377,000 going to the Gulf Coast, U.S. Energy Department data show. U.S. refineries processed more crude last week than any since Jan. 9 as units returned to operation after maintenance.

“Refiners come back and you will get a bigger call on that crude,” Malek said.

Several refineries in U.S. Midwest states including Indiana and Illinois invested billions of dollars in recent years to be able to process the plentiful supply of cheaper heavy crude. There is more supply available after Enbridge Inc.’s Flanagan South and Enbridge and Enterprise Products Partners LP’s Seaway Twin pipelines started operation late last year, expanding capacity from the Midwest to Texas.

Canadian Discount

WCS, a benchmark grade for Canada’s oil sands producers, has traded at an average discount to WTI of $16.68 a barrel over the past year. The discount has widened to as much as $42.50 in the past when pipeline transport out of Alberta was disrupted.

The discount may also narrow as oil sands operations that rely on steam to melt bitumen are shut for maintenance, typically in September, Carl Evans, an crude analyst at Genscape Inc., said in an instant message.

Canada, the world’s fifth-largest oil supplier, produces most of its oil from bitumen dug or melted and pumped out of the ground in northern Alberta. Some of the bitumen is diluted for shipment by pipeline or rail to refineries, most thousands of miles away in the U.S. The rest is processed in an upgrader into synthetic crude.

Synthetic crude traded at $2.75 a barrel more than WTI today, the biggest premium since May 1, data compiled by Bloomberg show. The price has strengthened as companies shut upgraders for maintenance. Syncrude Canada Inc. said Wednesday its synthetic crude production fell to 291,000 barrels a day in March from 300,000 barrels a day in February.

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