E Global Crude Oil Prices Have Increased, But The Discount On Canadian Oil Has Also Risen

“The discount on the Canadian effective price (CEP) vis-à-vis WTI has risen to over US$20, more than double its 2017 average (US$9.61). Futures contracts currently suggest that the differential between WTI and the CEP will narrow to the US$15 range by the summer, in line with a return to full capacity of the TransCanada Keystone pipeline and as rail transport adjusts to higher volumes, and to remain at this level on average over the 2018–2022 forecast horizon.” (Canada’s Feb. 2018 Budget, Annex 1: Economic and Fiscal Outlook)

World crude oil prices increased in 2017 compared to the previous year. The recent Canadian Budget document indicated that the price of West Texas Intermediate (WTI) crude oil averaged just under US$51 per barrel, compared with an average of US$43 per barrel in 2016.

Improved prices were supported by the step up in the global economy and the agreement between Organization of the Petroleum Exporting Countries (OPEC) nations and 10 non-OPEC producers to restrain their collective output. In January of this year, WTI prices rose as high as US$66 per barrel for the first time since December 2014, before declining slightly in February.

However, the recent price gains were constrained by the growth in the shale oil sector. Indeed, U.S. crude oil production increased steadily through 2017, reaching its highest level in more than three decades.

The U.S. Energy Information Administration estimates that U.S. crude oil production will increase to as high as 10 million barrels per day, rivalling Saudi Arabia and Russia to become the world’s top crude oil producer.

Unfortunately, the recent rise in global benchmark prices has not been matched by higher prices for Western Canadian producers. Even when oil prices were closer to $100 (U.S.), the Canadian industry and successive provincial leaders blamed hefty discounts on Canadian oil for sapping billions in revenue

The price gap between the price of Canada’s oil benchmark versus its U.S. equivalent, West Texas Intermediate, has widened to its biggest difference in almost four years, with Canadian crude now selling at a $25 discount. The price gap is due to transportation bottlenecks on pipelines and rail transit to the U.S.