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Canada's heavy WCS blend falls to lowest outright price on record, stressing producers

Highlights

Canada's WCS drops to below $10/b, lowest outright price on record

NYMEX WTI plunge slashes value of Canadian, Bakken crudes

Canadian companies cut 2020 spending

New York — The outright price of Western Canada's benchmark heavy crude blend fell to the lowest level on record Wednesday, underscoring the struggle many of the country's producers will face to survive in the coming weeks and months.

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S&P Global Platts assessed Western Canadian Select at Hardisty, Alberta, at a discount of $13/b to the WTI CMA, bringing the outright price to $9.38/b. That is the lowest value assessed by Platts in data going back to April 2006. It is also $4.62/b below the previous low of $14/b reached on November 14, 2018.

Platt's assessment was based on recent bids, offers and trades, as well as the plunging value for NYMEX WTI. Several market sources said no physical barrels of WCS at Hardisty traded Wednesday for the April or May cycles, which is typical in the early days of a new contract month.

"Everyone is under water now," one trading source in Calgary said. "At least on the back of the napkin type of math."

Another trader who works with Canadian producers said the current pricing environment may put existing deals in jeopardy.

"I'm a bit worried about Canadian counterparties performing," the trader said.

The collapsing value of Canadian grades and the underlying WTI basis come amid reports US refiners are considering cutting runs as COVID-19 cuts global economic activity and transportation. So far, margins for USGC refiners making diesel and gasoline are still positive, according to S&P Platts Global Analytics. The Mars coking margin in the USGC was $5.74/b on Tuesday, up from the $4.70/b on Monday, supported by local demand and the diesel export market.

Inland refiners, including those in the Midwest, are most at risk, because they have limited outlet for their products. In the Midwest's Group 3 market, with virtually no access to product outlets outside its borders, cracking margins for WTI ex-Cushing remain positive but below USGC levels at $3.78/b on Tuesday, Platts Analytics data shows.

Several Canadian producers have announced spending cuts because of the price drop. Most recently, Whitecap Resources said Wednesday it would slice its spending nearly 45% down to just more than $140 million and that its production would fall about 6% to 67,500 boe/d in 2020. Calgary-based Kelt Exploration said it would trim spending 36% down to $100 million with its production dipping 12% to 35,000 boe/d.

In addition to a deteriorating outright value for heavy Canadian crude, Canadian producers face the added hurdle of high transportations costs to ship their oil to the US market. Crude costs about $12/b to ship from Alberta to the USGC on a long term rail contract, and around $16/b to $18/b on a spot deal. Shipping on pipelines is cheaper, but traders have said the price difference between Hardisty and the USGC needs to be greater than $10/b for most shippers to make money.

The price spread between Hardisty and Nederland, Texas, remained unchanged from Tuesday at $5.75/b, which was the narrowest spread between the two locations since 2017.

Canadian Sweet grades and Bakken crudes out of North Dakota have also plunged in value with the decline in NYMEX WTI.

"Diffs are just going down, down, down. Almost as fast as WTI," one Bakken crude trader said Wednesday. "It's ugly out there."

May Bakken crude in the Williston Basin was assessed at a $6.25/b discount to the WTI CMA Wednesday. That put the outright value at $16.13/b, the lowest on record for the front-month outright for Bakken Williston, based Platts data.

The lowest level assessed before this week was on February 11, 2016 when it reached $24.72/b.

So far this year, the Williston Basin outright had averaged about $45.60/b and has fallen some 70% since early January.

March and April barrels also were heard trading at even deeper discounts. March Bakken Williston was heard bid at WTI CMA minus $20/b and offered at minus $11/b. April was heard traded at WTI CMA minus $7/b.