Canadian oil producers have been left watching from the sidelines as global crude prices soar well above $100 (U.S.) per barrel because of concerns about political unrest in the Middle East and rising imports from China.
While crude oil is typically seen as an international commodity, local market conditions have resulted in a widening gap between West Texas Intermediate – the trendsetter for Canadian oil prices – and international crudes such as North Sea Brent.
Brent prices jumped more than 2 per cent on Monday – briefly topping $104 (U.S.) per barrel – to settle at $103.88 per barrel. Protests in Yemen, Bahrain, Algeria and Iran stoked fears about the reliability of supplies from the oil-rich Middle East and North Africa, while China reported strong oil import numbers.
In contrast, WTI lost 77 cents to $84.81, its lowest point since early December. The last time global crude prices rose above $100, WTI moved in virtual lockstep with international grades.
"One of the weakest crude prices in the world right now is West Texas," said Martin King, Calgary-based analyst with FirstEnergy Capital Corp. "And unfortunately, a lot of Canadian crudes get priced as either a discount or premium to West Texas."
Over the past half-century, WTI was the most-often quoted price when people talked about international oil prices, reflecting the United States' dominance in world energy markets. The price was typically set on the New York Mercantile Exchange, where futures contracts are priced based on market conditions at Cushing, Okla., a significant mid-continent refining hub.
But Cushing is a landlocked refining market, without access to the massive Gulf Coast refinery hub. Both U.S. and Canadian producers are delivering increasing volumes of crude to Cushing, but demand remains weak, so storage capacity is full.
As a result, WTI prices remain relatively weak compared with international crudes – though few producers are going to complain about an $85 oil price.
The glut of supply at Cushing will remain until pipeline companies can build new capacity to move crude to Texas and Louisiana in projects such as TransCanada Corp.'s Keystone XL or Enbridge Inc.'s Monarch pipeline.
Western Canadian companies also sell into other markets, mainly Ontario and the U.S. Midwest, but both of those regions are heavily influenced by WTI.
The days of West Texas crude serving as a major international benchmark may be over, says Pavel Molchanov, a Houston-based analyst with Raymond James & Associates.
"As energy investors, we're very accustomed to looking to WTI when we ask, 'What's the price of oil?'," Mr. Molchanov said. "But for the time being at least, that's a very misleading number, an artificial number. And Brent is a better proxy for the international oil price."
Still, Canadian crudes have seen their prices decline even relative to WTI in recent weeks.
"Not only is West Texas weak, but there is additional weakness in the Canadian differential," Mr. King said. "So it's a lose-lose situation, really. Some of these guys – they're not suffering but they're not getting the upside benefit."
Eastern North America relies more heavily on imported crudes such as Brent, or West African supplies that carry a similar price tag. Valero Energy Corp., which owns the Ultramar refinery in Quebec City, said its supply there is priced against Brent.
However, gasoline and other petroleum product prices don't reflect the kind of geographic differential that exists in crude markets. Wholesale gasoline prices were roughly the same in Saint John, Sarnia, Ont., and Edmonton, noted Michael Ervin, vice-president with Kent Marketing Services Ltd.
As a result, refiners who rely on the more expensive crude supplies are seeing their margins squeezed, Mr. Ervin said.