Canada’s Heavy Oil Crisis Worsens

The deep discount applied to Canadian heavy oil will impact Athabasca Oil Corp.’s (TSX:ATH) second-half 2018 performance.

The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The spreads between Canadian oil blends and the North American benchmark West Texas Intermediate (WTI) have widened considerably since the end of May 2018. Canadian heavy oil, known as Western Canadian Select (WCS), at the end of October 2018 was trading at a 61% discount to WTI with it trading at a spot price of just under US$18 a barrel compared to US$64 for WTI.

This is having a noticeable impact on the energy patch, because heavy oil makes up roughly half of all Canadian crude produced.

That deep discount is weighing on the price of many heavy oil producers such as Athabasca Oil(TSX:ATH), which has lost 3% over the last year, despite WTI gaining over 17%. While the discount has whipsawed wildly since the start of 2018, having recovered briefly to be less than US$20 a barrel, there are indications that WCS will trade at a marked discount to WTI for some time to come. 

Now what?

Heavy oil is more costly to refine than lighter sweeter types of crude, and this in part is responsible for the discount applied to WCS, but it isn’t the key driver. The primary problem is growing oil inventories in Western Canada, notably Alberta, which are expanding at a rapid clip because of a lack of transportation capacity.

A notable trigger of the recent widening of the spread was the restart of the Syncrude operation, which had been offline for roughly three months because of an unexpected power outage. This added pressure to already surging inventories and growing supply, which saw oil stocks in Western Canada recently reach record levels. That — along with upstream oil producers ramping up activity to expand production so as to take advantage of firmer crude — has created a localized oil glut in Western Canada.

Even crude-by-rail shipments are failing to clear the backlog, which is being exacerbated by a significant lack of pipeline capacity. Data from the National Energy Board (NEB) shows that crude-by-rail carloads reached 229,544 barrels daily for August 2018, which was an all-time high, but remained insufficient to clear inventories.

While many U.S. refineries are configured for and prefer to process heavy oil the maintenance, and turnaround season is underway because of lower demand for gasoline as well as asphalt. As a result, many refineries that are major consumers of WCS in the U.S. Midwest have gone offline because of planned maintenance.

This has sparked a noticeable drop in demand for WCS in Canada’s core oil export market that even the sharp deterioration in the volume of Venezuelan heavy crude imports is failing to remedy. For as long the oil glut in Western Canada continues, the discount applied to WCS will be substantial.

So what?

That means the second-half 2018 outlook for Athabasca is not as positive as higher oil prices initially indicate because around 68% of its production is weighted to bitumen. For the second quarter 2018, Athabasca realized an average price for WCS of $62.89 per barrel, which is almost triple the current spot price of just over $23 a barrel.

Over the course of the second half of the year so far, WCS hasn’t traded at above $60 per barrel since mid-July, although the impact of weaker WCS will be offset to an extent by Athabasca’s commodity hedging contracts. Up until the end of September, it has 19,000 barrels daily hedged; after that it has 3,000 barrels hedged. The sustained weakness of WCS will impact many upstream heavy oil producers and could very well see a dip in financial results for the industry over the second half.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Energy Stocks

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Got $1,000? 3 Pipeline Stocks to Buy and Hold Forever

Here are three top dividend-paying Canadian pipeline stocks you can buy right now and hold for as long as you…

Read more »

man touches brain to show a good idea
Energy Stocks

3 No-Brainer Energy Stocks to Buy With $1,000 Right Now

Given their solid underlying businesses and healthy growth prospects, I am bullish on these three energy stocks.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Sector Stocks to Invest in for 2025

Here are three top Canadian energy sector stocks that look like solid buys in 2025 for those looking to ride…

Read more »

A meter measures energy use.
Energy Stocks

Got $2,500? 3 Utility Stocks to Buy and Hold Forever

These utility stocks are known for their solid earnings and consistent dividend growth, making them compelling investments.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Got $2,500? 3 Energy Stocks to Buy and Hold Forever

Along with capital gains, many Canadian energy stocks often pay dividend or enhance shareholder value through share buybacks.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Canadian Investors: Should You Buy Canadian Natural Resources Stock While Under $50?

If there's one thing I love, it's a deal. And right now, CNQ stock looks like it could be a…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Better Pipeline Stock: Enbridge vs. TC Energy?

Enbridge and TC Energy are two pipeline stocks that offer shareholders tasty dividend yields in January 2025.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

2 TSX Stocks to Invest $20,000 and Create $2,597.60 in Passive Income

Need income? We got you, with these two top dividend stocks due for more solid growth and passive income.

Read more »