It’s been a really tough year for oil nations around the globe, but nearly no one has had it worse than poor Canada. On that infamous day, April 20th, when oil prices plunged below zero in a historic bottoming-out thanks to an oil glut, OPEC+ price war, and absolutely demolished demand due to the pandemic, Canadian oil prices actually dipped into the negatives hours before the West Texas Intermediate crude benchmark followed suit. Even before Black April, as some have started to call it, Canadian oil had hit a rough patch. Years of pipeline shortages have provided the Canadin oil sector with a strange complication: plenty of supply and plenty of demand, but no way to connect the two. The severe lack of modes of transportation for Canadian oil created a supply glut which then forced Canadian oil producers to sell their product at a major discount. This unfortunate situation ended up costing Canadian producers a whopping $20 billion in lost profits in 2018, according to calculations by conservative think tank the Fraser Institute.
And that’s not the only issue. The other problem is the incredibly environmentally unfriendly oil sands that are the heart of Canada’s oil industry. The severe negative environmental externalities associated with the oil sands and their form of extra heavy crude– the naturally occurring bitumen is a thick, viscous, and sticky kind of crude oil that is particularly dirty–have caused lots of conflict and faces big fines stemming from polluter pays principles.
But now, it looks like there is finally some good news coming down the pike for the oil sands. According to BMO Capital Markets, Canadian oil prices are projected to improve over the next year thanks to a tapering off of Mexican heavy crude exports to refineries on the United States Gulf Coast, opening up the market for Canadian oil. “Oil sands producers will benefit from less output of competing crude from Latin America as Petroleos Mexicanos expects to cut exports while Venezuelan supplies remain off limits due to U.S. sanctions,” Bloomerg reported on Thursday. Pemex, Mexican state-owned oil company, “ is forecasting a reduction of almost 70% in exports of its flagship heavy crude between 2021 and 2023” says Bloomberg.
The BMO report, released Wednesday, states that the gap between Heavy Western Canadian Select and the West Texas Intermediate benchmark is set to narrow in 2021, potentially achieving a gap of just $5 to $7. “Western Canadian Select discount to WTI strengthened to less than $10 a barrel since mid-April, after more than a million barrels a day of oil sands production was shut due to the Covid-19 pandemic,” the Bloomberg article went on to explain. “The strong differential has remained near $10 even as oil sands supplies have returned to the market.”
Over the past few decades, United States oil refiners on the Gulf Coast and in the Midwest have invested heavily into installing infrastructure especially designed to process heavy crude, largely in order to process the kinds of oil being sold by Mexico and Canada now that other grades of oil coming out of the Americas have largely been diminished. Canada, in particular, is one of the world’s biggest producers of such types of heavy crude, which has gained a lot of value since lighter grades of oil coming from Latin America have become more scarce. That trend is set to continue in the immediate future– another desperately needed boon for Canadian oil markets.
And, in a final piece of good news, it looks like Alberta’s long standing pipelines woes are also going to ease up a bit in the coming year. With three major export pipelines already under construction, Canada will be able to bring at least 50,000 barrels a day of additional exports to market. If only Canada could share some of it’s good fortune with its neighbors to the south, where U.S. shale exporters are still waiting–perhaps in vain–for a silver lining to their own bottomed-out oil market.