In this week’s EconMinute, we’re talking about oil prices. Sort of. We are actually looking at the price difference between Canada’s benchmark heavy crude, Western Canadian Select (WCS) and North American benchmark West Texas Intermediate (WTI).
WCS is produced from Alberta’s oil sands. It is heavy and sour, making it more difficult to refine into valuable end products than lighter, sweeter oils such as WTI.
This extra cost to process WCS, along with the cost to transport the oil from Alberta to its primary market in the US Gulf Coast, and the lack of non-US markets, means that a barrel of WCS is naturally priced at a discount to a barrel of WTI.
While this discount is largely unavoidable, the magnitude of the discount can vary based on things like pipeline capacity, supply and demand factors, and global conditions.
In the latter half of 2022, the WCS-WTI differential widened significantly. By year-end, WCS was trading at nearly US$30 per barrel less than WTI—the largest price differential since late 2018, when the sector faced a severe shortage of pipeline capacity. Moving into 2023, the price differential has narrowed considerably.
Here’s what we know:
- In 2022, releases from the US Strategic Petroleum Reserve (SPR) combined with unplanned shutdowns of heavy oil refineries and high natural gas prices (which increase the cost of refining heavy oil) reduced demand for Canadian crude, widening the gap between WCS and WTI.
- With those factors now largely resolved, Albertan heavy oil producers are benefiting from a narrowing WCS-WTI differential despite declining oil prices overall.
- Last month, the WCS discount stood at US$13.85 a barrel, down more than half what it was six months earlier ($US29.38 in December 2022).
- Currently, the discount is US$21.25, but analysts expect the WCS-WTI differential to continue narrowing as heavy oil supply is strained with Mexico substantially reducing its exports.
The narrowing WCS-WTI differential is not only good news for Alberta producers but also for the provincial government. For every $1 change in the differential, the provincial government can anticipate an additional $600 million in revenue. Budget 2023 assumed an oil price differential of $US19.50, and the remainder of fiscal 2023/24 may very well come in below that spread. However, lower-than-expected oil prices may negate a tightening differential’s positive impact on government revenue. WTI prices are currently $10 below the US$79.00 per barrel assumption in the 2023 budget.
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