The price differential between benchmark U.S. crude oil and Canadian oil is set to widen back up to US$20 a barrel this year, according to a report from TD Economics, which says a series of production bottlenecks in Canada will further discount the oil price.
TD economists Omar Abdelrahman and James Orlando said they expected the price gap between West Texas Intermediate (WTI) and Western Canadian Select (WCS) to increase to US$15 to US$20 by the end of 2019. The differential currently stands at nearly US$11.
“With respect to Canadian benchmarks, all signs point to a widening of the WTI-WCS differential in the medium term,” the report on Thursday said.
“This forecast reflects longstanding transportation issues, the fading impact of the [Alberta] curtailment plan, and the recent drop in crude-by-rail shipments.”
While Canadian oil spreads have narrowed significantly since the Alberta government announced a plan to cut production in December, the economists said the impact of the temporary solution is already waning after the government eased production limits in February in response to improving oil prices and inventory reductions.
“We doubt that this low discount can be sustained in the near and medium term amid still-high inventories and a recent collapse in crude-by-rail shipments,” the report said.
“Announcements by some producers have suggested that the recent spread levels (around US$10) are too low to justify the marginal cost of crude-by-rail shipments (at around US$15-US$20 range).”
The latest data from U.S. company Genscape, which monitors western Canadian terminals, showed crude-by-rail shipments saw a small recovery in March after falling to their lowest levels in nine months in February. But, oil storage levels remained high despite the Alberta production cuts.
“This recent drop in energy export volumes and crude-by-rail shipments will likely slow down the inventory draws in the near term, thus adding further uncertainty,” the report said.
Added to that, a lack of pipeline capacity over the longer term will continue to be a key barrier to higher Canadian oil prices, the economists said.
“A recent delay to [Enbridge] Line 3, initially relied on to start operations by the end of 2019, has added to the uncertainty – with the pipeline now expected to be completed in the second half of 2020,” the report said. “At the same time, there has been minimal progress on the Trans Mountain and Keystone XL pipelines from a regulatory perspective.”
The economists expect the price of WTI, which is currently around US$61 a barrel, to remain relatively flat and trade in the US$60 to US$65 range in the next two years, while the price of WSC falls.
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