February 7, 2022

Weekly EconMinute—Oil Price Differential

In this week’s EconMinute, we’re talking about the oil price differential between Canadian and American benchmark spot markets.

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Crude oil spot markets indicate the price of a marginal barrel at a particular location and at a given point in time. A spot market can be recognized as a benchmark when it is representative of a given region’s oil quality, marketability, and transportation costs.

For the oil sands, the two most consequential benchmarks are Western Canada Select (WCS) and West Texas Intermediate (WTI). WTI is the North American price benchmark that sets the stage for WCS prices. WCS trades at a natural discount compared to WTI because of its lower quality and higher transportation costs to market, among other factors.

Oil prices are once again rising. Alberta can capture more value from its resource when the price differential between WTI and WCS is small. While factors contributing to the natural discount are difficult to overcome, factors such as reducing pipeline constraints can help shrink the differential.

Recent data suggest the differential is in good shape for the foreseeable future.

  • According to one study, the natural price discount absent transportation constraints is approximately -$11.35.
  • In past periods of high oil prices, such as between 2011-2014, the differential tends to be wider, dipping to as low as -$38.94 in December 2013.
  • In November 2018, when prices were not as high but oil production remained strong, the discount averaged -$45.93—prompting the Government of Alberta to curtail production and purchase rail takeaway capacity to shrink the differential.
  • As of January 2022, the discount stands at -$12.73, just $1.38 more than the natural discount, despite record production and high oil prices.

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