Canadian crude producers are facing setbacks with the Trans Mountain Pipeline Expansion, which has resulted in an unexpected boon for refiners capable of processing heavy sour crude.
According to sources, the Western Canadian Select (WCS) has been trading at a significant discount of $28 per barrel under West Texas Intermediate (WTI) futures.
The Trans Mountain Pipeline Expansion holds the promise of allowing heavy crude producers to transport an additional 590,000 barrels per day (b/d) to the Pacific Ocean. This increased capacity will facilitate the shipment of a substantial amount of crude to Asian markets via ships. The pipeline’s most recent update indicates that a tariff of approximately $8 per barrel will be implemented from Hardisty, Alberta, to the Burnaby terminal in British Columbia.
Many industry experts anticipate that once this segment is completed, the WCS blend’s discount will reduce to a more modest range of $14 to $15 per barrel.
Considering that WTI futures were trading at around $82 per barrel on Monday, the calculations indicate a current price of approximately $54 per barrel Free on Board (FOB) at Hardisty or roughly $58 per barrel when delivered to refineries in Minnesota, Illinois, Indiana, Ohio, Michigan, and Kansas.
Bulk Prices for Gasoline and Diesel
At first glance, bulk prices for gasoline in these markets are unremarkable with Group 3 and Chicago conventional gasoline pegged at 5cts/gal off RBOB futures, or about $2.20/gal. But when compared to a $58/bbl crude cost, refiners who can process heavy sour Canadian crude are seeing gross margins of above $34/bbl.
Impressive Returns for Diesel Refiners
Even more outstanding are the returns for diesel among those refiners. Group 3 diesel was fetching about $2.82/gal Monday morning or nearly $118.50/bbl, which works out to more than twice the cost of the heavy crude feed. Chicago is even more spectacular with diesel there at $2.915/gal, or about $122.50/bbl.
The Future of Canadian Crude Prices
Most observers believe that the current and next calendar quarters represent the last periods when Canadian crude will be priced at such massive discounts.
Strategic Petroleum Reserve Considerations
They also note that while Canadian prices meet the Department of Energy criteria for prices at which replenishment of the Strategic Petroleum Reserve is advisable, the solicitations for SPR refilling have called for U.S.-produced crude with lower sulfur levels.