Experience RS

WCS Floating in a World Alone

Western Canada Select (WCS), a benchmark for heavy crude prices in Canada, and WTI, the slate used for futures trading, were historically highly correlated. From 2015 through the majority of 2017, plotting the daily change in outright prices between WCS and WTI gave an Rof 0.79-0.91, where 1.0 equals perfect positive linear association. Said another way, pricing between the two hubs traded in a relatively similar direction to one another day over day.

The Keystone Pipeline outage in 2017 put pressure on already limited egress options and increased provincial crude oil storage levels, setting the stage for ultra-low outright Canadian oil prices through 2018. During this time, the WCS-to-WTI differential blew out and the historical correlation of WCS and WTI daily changes disconnected with an average monthly R2 of only 0.28.

Alberta's introduction of mandated production cuts in January 2019 curtailed crude output for most operators in Alberta, helping to reduce storage inventories through the first part of the year. The move caused WCS to WTI differentials to tighten, signaling the return of a more fluid market and improved the correlation of WCS and WTI daily price changes.

The production cuts progressively rolled off through 2019 and production limits this month are 3.81 MMbbl/d, 250 Mbbl/d higher than a year ago when the curbs began. But mishaps in late 2019 including another leak on Keystone in October and a CN Rail strike in November again threw off WCS pricing. Each upset caused reduced flow of crude from Alberta, building storage inventories and widening WCS-WTI differentials from ~$16/bbl in October to ~$23/bbl in January.

The Alberta Energy Regulator reported October storage volumes of ~69 MMbbl, an increase of 3.3 MMbbl since July. In the weeks following the Keystone outage and the CN strike, the daily change in WTI and WCS prices uncoupled and fell to an R2 of 0.35. In the wake of rising outright production and fewer-than-needed egress options, outright WCS barrels price alone and low. WCS no longer ties to WTI and instead floats in a world controlled by too much supply and not enough demand takeaway.

 FIGURE 1 | Alberta Crude Oil Storage Inventories, Correlation of Average Daily Change in WTI-WCS Outright Pricing

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