Mexico Feels Heat of Canada Crude as Price Advantage Narrows

Heavy Canadian crude sold at the smallest discount to Maya in four years as new pipeline and rail capacity allowed record volumes to flow south and compete with imports shipped in from the Gulf of Mexico.

Western Canadian Select traded at $33.29 a barrel today, a $4.61 a barrel discount to the similar Mexican crude, according to data compiled by Bloomberg. That was the smallest differential since December 2010.

U.S. crude imports from Canada rose to 3.26 million barrels a day in the week ended Jan. 2, Energy Department data show. The increase came as new pipelines including Enbridge Inc.’s Flanagan South and Seaway Twin pipelines ramped up.

“Producers are shipping more volumes of Canadian crude into the Gulf of Mexico and that has had an impact on the WCS prices,” Dinara Millington, the vice president of research at the Canadian Energy Research Institute in Calgary, said by phone today. “They are getting down into the Gulf where they are competing with Mexican Maya, Venezuelan and other imports.”

New rail terminals such as Canexus Corp.’s Bruderheim and Gibson Energy Inc.’s Hardisty started operation, adding to the crude flows, according to Carl Evans, crude oil analyst at Genscape Inc.

Maya and WCS prices will “slowly come in closer with all the new rail takeaway that can now easily handle production growth,” he said in a message.

Crude Costs

Canadian crude oil is among the cheapest in the world to buy and most expensive to produce as oil sands must be either dug out of the ground and the bitumen separated from the sand or it must be pumped from the earth after it’s heated with steam. The crude then must be shipped by pipeline or rail thousands of miles to refineries, most in the U.S.

Crude costs about $19 to $22 a barrel to ship by rail from western Canada to the U.S. Gulf Coast, according to a March report by the Canadian Association of Petroleum Producers. The price to ship heavy Canadian crude by pipeline is $8 to $9 a barrel, Millington said.

WCS for February’s discount to U.S. benchmark West Texas Intermediate crude narrowed today, shrinking 40 cents to $12.80 a barrel on the Husky pipeline at 2:07 p.m. in Calgary, according to Net Energy brokerage. The discount fell to its narrowest since Oct. 14, according to data compiled by Bloomberg.

Last month, Mexico’s state-owned Petroleos Mexicanos reduced the official selling price of its Maya crude. Maya for the U.S. traded at $37.90 a barrel today, down 52 percent in three months. U.S. crude imports from Mexico totaled 533,000 barrels a day the week ended Jan. 2, the lowest since the week ended Nov. 21, Energy Department data show.

U.S. oil futures have lost about half their value in the past three months as the Organization of Petroleum Exporting Countries refused to curtail output amid a surge of North American production.

Before it's here, it's on the Bloomberg Terminal.