Consumers paying gasoline prices derived from roughly $100 WTI or $115 Brent are going to find this hard to believe, but there's one place in the oil market where suddenly, there is way too much crude. And prices are showing it.
That area is Alberta and North Dakota, and the prices for crudes out of those regions have collapsed in the past two weeks in a fall relative to the rest of the world that is almost unprecedented. Even as WTI moved further below Brent last year, it didn't have the type of rapid collapse now being seen from those regions.
Western Canada Select was assessed yesterday by Platts at approximately $32.70/b under the NYMEX calendar month average, which is calculated using the first two months' of prices of NYMEX light sweet crude prices. That spread at the end of 2011 was minus $15.50. A year ago, it was about minus $8. These numbers for WCS aren't unprecedented; it got to almost minus $50 in 2007. But it's still rare.
The light sweet crude that comes out of the oil sands' upgraders called Syncrude opened up the year at $1.05/b more than the calendar average WTI. It's now approximatley $22.50 less than the average. Before the past few days, that spread had never been wider than $5, according to Platts data. With WTI sliding against Brent and Light Louisiana Sweet once again, Syncrude is now more than $40 less than LLS, even though they are both light sweet grades.
It's not just hitting Canada. Bakken Blend at Clear Brook, Minn., a key delivery point along the Enbridge pipeline system for the crude from North Dakota, was assessed at the end of this week near $28/b less than the calendar average. At the start of February, it was minus $10.50. At the end of December, it was minus $3.50.
As Platts' Associate Editor Lucretia Cardenas, who covers these markets, said of the decline:
"There's a ton of production and it can't get to other markets. It has saturated the Midwest market, which has some upcoming refinery turnaround work. At the same time, you can't get past that Midwest because of long-standing issues with delivery out of the Cushing delivery point for the NYMEX. So it's either going to sit in the Midwest or sit in Canada unless you can get it someone else. Your storage is just building and building. That's what has created the huge drop. Nobody expected it to drop this much this fast. The Midwest refining market has some upcoming maintenance work, so some weakness was expected as a result of that. But not to this extent."
There are other factors, including what can only be described as simply a flood of oil coming from the earth. Take your pick; all of them point to the incessant rise in output, some of it coming as a result of abnormally warm weather in Alberta and North Dakota, which has allowed output to avoid being hindered by the elements.
- Bakken Blend crude production in North Dakota climbed to an average of 534,879 b/d in December, a new record for the state, according to preliminary data released Wednesday by the state Industrial Commission's Department of Mineral Resources.
- Total crude production in Canada for December averaged an estimated 3.2 million b/d, according to the latest data released by the National Energy Board. December output was 4.43% more than November--an enormous rise for a single month--and 6.4% more than December 2010, NEB statistics show.
- Veteran oil sands producer Suncor said this week that its January crude output rose 7.9% to 355,000 b/d over January 2011's production. Other companies and upgraders are reporting similar numbers.
So how does all this oil get out? Producers are clamoring to get oil on pipelines and move their output away, but there's only so much room. Enbridge has two key lines in the US, which are fed from the main line coming out of Alberta: the 231,000 b/d Ozark line runs from Cushing, Oklahoma, to Wood River, Illinois, which is still the Midwest but tends to not be as price-pressured as Cushing. The 190,000 b/d Spearhead ships crude from Flanagan, Illinois, to Cushing. Demand for space has been strong; Enbridge is limiting February crude nominations on Ozark by 92%, meaning shippers can only ship 8% of nominated volumes. Spearhead's similar number is 76%.
The Trans Mountain Pipeline, which takes oil to the West Coast, only took a little bit more than one quarter of the nominations it received for February.
As far as rail goes, it continues to boom. As Lucretia noted: "Everyone is scrambling for rail cars. Traders that can do both finished up their monthly oil trading on pipelines early, and then got into selling rail cars."
As the Brent/WTI spread widened through much of 2011, traders found all sorts of new ways to get oil out of the Midwest--which was being fed by Alberta and the Bakken--to more lucrative markets. A rail-barge combination to Philadelphia via Albany; barges out of Cushing along rivers that had never been pathways for crude; and construction of rail infrastructure to regularly ship oil to the Gulf Coast...all were undertaken by traders. Now, the problem is that the capacity even on those creative routes is largely full or strained.
And all of this is happening not one month after Keystone XL was put on the shelf for at least a year by the Obama administration. So the proximity of the price collapse with that decision surely has been noticed by producers, who suddenly find their oil worth $20 less than it was just a few weeks ago, even as world prices have held steady.
(Friday afternoon update: differentials strengthened in trading today. The Syncrude differential ended the week at the NYMEX front calendar month average minus $20.75/barrel, a $2.25/b increase from Thursday's assessment. The Western Canadian Select differential was assessed 85 cents/b higher than Thursday at minus $31.90/b. The Bakken Blend ex-Clearbrook differential rose $6/b from Thursday to be assessed Friday at minus $22/b.)
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