Pricing in pipelines? Canadian crude price surges 70% in three months

The price oil sands producers receive surged to just $30 a barrel below the international benchmark on Friday, more than halving the discount since mid-December.

The massive improvement in Western Canada Select – a blend of heavy oil sands crude and conventional oil – came as the spread between the blend and US benchmark West Texas Intermediate (WTI) narrowed to just $16.60 from from five-year lows of $41 on December 13.

At the same time WTI’s discount to the global oil price in the form of North Sea Brent has narrowed to $13 from $23 over the same period.

Brent settled at $107.50 in Europe on Friday which translates to an effective price for bitumen-derived oil from Alberta’s oil sands of $77.20 a barrel today, from only $45 three months ago.

The value of Syncrude, a light oil made from oil sands after undergoing an expensive upgrading process, has also improved since December from par to $6 above WTI.

The pervasive bitumen discount to global oil prices is not because Alberta’s oil sands crude is of inferior quality – the price of Maya heavy oil in Mexico sold in the US Gulf is of similar quality to WCS but is priced above WTI.

The reason Canada’s oil attracts these pricing levels is because the country only has one customer – over 99% of Canadian exports end up in the US.

Alberta’s landlocked oil cannot reach lucrative growing markets in Asia because of a lack of pipelines which turns the province into a price-taker.

But there has been some good news on this front which may explain why the value of Canadian crude has improved the way it has.

At the start of March, a US State Department report approved the Keystone XL pipeline as environmentally sound.

The decision is now before US President Barack Obama, but it seems unlikely that the TransCanada project to link Alberta’s oil sands to refineries on the US Gulf coast will be shot down now.

Two other major projects currently under review, Enbridge’s Northern Gateway pipeline to the northern British Columbia coast and Kinder Morgan’s twinning of an existing pipeline to the port of Vancouver, would also relieve bottlenecks and give access to new markets and better prices.