Canada's WCS differential 'compresses' to one-year high as WTI plummets

New York — The differential for Western Canada's benchmark heavy crude rose sharply Tuesday to a one-year high as NYMEX WTI June crude futures plunged to below $11/b, a counterintuitive move traders said does not reflect supply and demand fundamentals as much as technical movements.

S&P Global Platts assessed Western Canadian Select at a discount of $8.25/b to the front-month NYMEX light sweet crude futures contract calendar-month average (WTI CMA) Tuesday based on a trade at that level, the strongest value since April 8, 2019, and a gain of $4/b from Monday. The move came as the June WTI contract plunged to an intra-day low of $10.92/b.

Asked if the stronger differential for WCS represented increased demand or less supply, one Calgary-based trader simply said, "No." As June WTI falls, eroding the value of the WTI CMA, the WCS differential "has to get tighter," the trader said.

The tendency for the WCS differential to strengthen as the underlying WTI CMA basis weakens has flummoxed some Canadian crude observers who have speculated on social media that the WCS blend would trade with negative value. Such a scenario has yet to occur for the front-month contract, which rolled to June on April 17, meaning Monday's collapse of May WTI did not affect the outright value of June WCS barrels.

Platts assessed the outright value of June WCS at $11.24/b Tuesday, up from the all-time low of $8.03/b reached April 1.

Traders often refer to the tendency for the WCS differential to tighten as NYMEX WTI falls as "compressing."

"I gotta think so," another trader said when asked if WCS reaching a one-year high was a reaction to the WTI plunge, adding that more cuts from Canadian producers could also be playing a role.

Canadian producers have slashed capital spending and output as the coronavirus pandemic hits the global economy and weakens demand.

Husky Energy, one of the latest Canadian producer to announce capex cuts, said Monday it would reduce its total forecast 2020 spending by another US$700 million, to a level which is now about half of its original roughly $3.3 billion. The company has also reduced its production by more than 80,000 b/d, mostly heavy oil, and could reduce volumes further.