Canadian heavy oil cheaper than a pint of beer as North American demand for fuel plummets

Gas prices in Edmonton reflect how little choice Alberta producers have to do anything but put their oil in storage and wait for better prices

 

CALGARY – As commuters stay home and lockdown orders spread across the U.S., the price of Canadian heavy oil has collapsed.

Western Canadian Select heavy oil price benchmark fell 30.5 per cent on Thursday to US$6.45 per barrel, which analysts joke is less than a pint of beer. U.S. crude prices fell 7.7 per cent to US$22.60 per barrel.

“Prices are so low that there’s no point in transporting if you don’t have to. If you can move it into storage, you will,” said Stephanie Kainz, senior associate at RS Energy Group, a division of Austin, Tex.-based Enverus.

However, Canadian producers that are able to move their barrels directly to the U.S. Gulf Coast refineries through existing pipelines have been able to enjoy higher prices, of close to US$16 per barrel, as American refineries still want Canadian heavy oil, despite dwindling demand for fuel.

“U.S. refiners that can process heavy sour crudes have historically enhanced their margins by importing Canadian crudes, priced at a discount to West Texas Intermediate North American benchmark prices,” Moody’s Investors Service analysts wrote in a Thursday report, which said the outlook for refiners is negative for the next 12 to 18 months.

 

The coronavirus pandemic has caused demand for commuter fuels such as gasoline to collapse to the point where wholesale price of a gallon of gasoline in Chicago is just 20 cents per gallon. “A banana at that level is worth more,” Patrick De Haan, head of petroleum analysis at GasBuddy in Chicago.

“We’ve seen demand plummet, but I don’t think we’ve ever before seen prices fall so substantially,” De Haan said. “We’re shaping up for a plunge in gasoline demand that we’ve never seen before. Without a doubt, every day that we go on like this, we’re talking about a situation where (oil) supply is exceeding demand by 15 to 20 million barrels.”

Data from the U.S. Energy Information Administration show that crude oil inventories in the U.S. increased by 1.6 million barrels last week to hit 455.4 million barrels of crude oil in storage.

Those numbers imply only 200 million barrels of crude oil storage space remains empty across the U.S. but there’s an incentive for more oil producers to store their crude, said RS Energy’s Kainz.

“It’s everyone rushing to get to storage and take advantage of that contango curve – putting that oil into storage for later,” Kainz said.