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Apr 21, 2020

For once, Canada's oil looks better than WTI but there's a catch

Risk of June oil futures contract going negative


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For the first time ever, Canada’s benchmark oil price was higher than the headline number in the U.S. after futures in New York cratered to negative territory, but oil-sands companies have more reason to fear than celebrate.

All too familiar with price pain, producers in northern Alberta have a less liquid market and an apples-and-oranges comparison to thank for the apparent price advantage more than anything else. The signal the crash in New York sends is far more ominous for Canada than it seems at first glance.

Canadian heavy crude has to travel much longer distances than light oil from shale fields to get to the same place, the U.S. Gulf Coast, giving it a competitive disadvantage that no bad day in New York can erase. So, if prices stay this low in the U.S., things are bound to get worse in Canada.

“We are still in the worst shape, anyway you look at it,” Tim Pickering, founder and chief investment officer of Auspice Capital Advisors in Calgary, said by phone.

But for now, at least, the Canadians seem better off.

The Canadian benchmark is priced at a discount to average U.S. futures for an entire month, shielding sellers from the worst excesses of a single day. More importantly, the current contract for West Canada Select is for June delivery, and the Western Texas Intermediate sell-off in the U.S. was for May contracts set to expire on Tuesday.

“The May sell-off of WTI doesn’t affect the price people are getting for WCS,” Pickering said. “It’s still very low, but it’s not negative.”

WCS for June was trading near US$12 a barrel on Tuesday, according to NE2 Group. That compares with roughly US$13 for June WTI in New York. Meanwhile, May WTI, which collapsed to minus-US$37.63 a barrel on Monday, traded at around US$5 on Tuesday as storage at the Cushing, Oklahoma pricing hub is nearly full. If Cushing fills up, it’s just a matter of time until Canadian crude hits the same wall.

In the American physical market, where prices are based on daily futures, crude sold below zero everywhere from the Bakken shale of North Dakota to the Permian Basin of West Texas.