US refiners eye Canadian oil once strategic reserve closes the taps

A maze of crude oil pipelines and valves at the Strategic Petroleum Reserve in Freeport, Texas, on June 9, 2016.Richard Carson/Reuters

US refiners are expected to buy more Canadian oil after the Biden administration ended releases from the Strategic Petroleum Reserve (SPR) this fall, traders said, adding that this should boost the price of Canadian barrels at a time of tight global supply.

The upcoming end of SPR issuance could change market dynamics once again in a year of extreme volatility following the Russian invasion of Ukraine in February. In March, the White House announced it would release 180 million barrels from the US Strategic Reserve to help cool high prices.

The releases have affected the price of Western Canada Select (WCS), the standard heavy Canadian class. This oil, due to its similar qualities to the high-sulfur crude that dominates US reserves, has traded at around $20 a barrel below US West Texas Intermediate (WTI) for most of the summer. In 2021, the average WCS discount was $12.78 per barrel, according to Alberta Energy.

Market sources said the WCS discount on WTI is expected to shrink as SPR supplies dwindle.

“Once that load has passed, and it might not be in the fourth quarter or the first quarter, but in the second quarter and beyond, we should see a much stronger difference than we are now,” one trader said. He added that he expects WCS in Alberta to be trading around $14 or $15 a barrel under WTI next year, compared to about $21 now.

However, increased production of medium-sulfur crude from OPEC countries such as Saudi Arabia, as well as discounted Russian Urals, could keep that spread wider, according to RBN Energy.

Matt Smith, chief oil analyst at Oil Canada, said Canadian crude exports from the US Gulf have fallen in the past two months, falling to around 130,000 bpd in July and August, down from last year’s pace of 200,000 bpd. The Americas in Kpler. Foreign buyers turned to discounted Russian barrels, reducing Canadian crude exports.

“It’s kind of a game of musical chairs,” said Mr. Smith. “When SPR releases expire, these refineries will seek to rely heavily again on Canadian barrels or seaborne imports.”

Some market participants are concerned that the limited pipeline capacity from Canada to the United States could cause bottlenecks. This could cause a glut in central Alberta, which in turn could lead to lower prices there.

Canada achieved a record 5.5 million barrels per day of oil production in 2021, according to the US Energy Information Administration, and is expected to reach 5.7 million barrels per day this year.

Enbridge Inc is once again rationing pipeline capacity, in a practice known as distribution, on its main system as Canadian production rises. This system ships the bulk of Canada’s crude exports to the United States.

Provisions fell sharply last year when the Line 3 pipeline expansion opened and came to a standstill from March through July, but Enbridge has since begun rationing capacity on its mainline again. Crude shipments to Kerrobert Center, Sask, were split 2 percent in August and 6 percent in September, Enbridge said.