WCS Discount Dips as US Demand for Alberta Crude Oil Increases

The oil space has been on a rollercoaster ride since 2015 began, but it seems it may be making a comeback. Scotiabank’s Patricia Mohr said in this month’s Commodity Price Index that “[w]hile global economic conditions remain lackluster and financial markets volatile, international oil prices have lifted off bottom and supply disruptions in Western Canada’s ‘oil patch’ have pushed up domestic netbacks.”

The bank’s Oil & Gas Index saw a jump in May and June as the discount on WCS crude oil off WTI narrowed significantly. Specifically, the discount on WCS heavy oil dipped to its lowest level since April 2009 as US demand for Alberta crude increased, a trend Mohr expects will continue into July.

“The discount on WCS heavy crude at Hardisty, Alberta has dropped from US$11.86 per barrel in May to US$8.57 in June and is currently US$7.44 for July deliveries,” Mohr states in the report. As mentioned, that’s the lowest since April 2009, and marks a mere 12.5-percent discount compared to the normal 20 percent.

According to Mohr, with WTI at around US$59 to $60, the WCS heavy oil price should be US$52 in July. She believes that price will “still [be] challenging for most producers, but [will yield] positive margins for low-cost SAGD bitumen projects.”

Investment opportunities in Alberta oil

Mohr isn’t the only analyst who’s been talking lately about oil in Alberta. Last week, Auspice Capital Advisors put out a research note that explains why the crude oil market in Alberta, the only market in the world currently in backwardation, presents opportunities for investors.

Backwardation happens when oil futures are expected to be priced lower than the oil spot price — that bodes well for investors with long-term exposure to oil, as it means they won’t lose money as the market rolls over time. ”Positive roll yield. They earn to hold and roll the exposure. As such if they have a view of a rising oil price, this will enhance that return versus detract from it,” Auspice’s note states.

For short-term investors looking to take advantage of the Alberta situation, Auspice recommends the Canadian Crude Oil Index ETF (TSX:CCX). For those interested in hedging WTI, it recommends selling the WTI ETF.

Uncertainties in Alberta

The reports from Mohr and Auspice both show that there are compelling reasons for oil-focused investors to keep an eye on Alberta. However, the points they outline are not the only factors that make the province an interesting one in terms of oil.

For example, the Alberta NDP’s decision to increase carbon fees will see major polluters pay $30 per tonne over two years, up from the current $15. Companies will also be required to reduce emissions by 20 percent over time, compared to the current target of 12 percent. The NDP estimates that the increased carbon levy will add $0.30 to $0.40 per barrel to the cost of production by 2017, but others expect it to be much higher.

The weather also plays a huge part in oil production in Alberta and the recent wildfires have been a major hindrance for operators. Cenovus Energy (TSX:CVE,NYSE:CVE) has now returned to operation after a forest fire in the Cold Lake region led to a precautionary 11-day shutdown of its operations. Canadian Natural Resources (TSX:CNQ), which operates in the same region, also shut down after an access road was closed, but has now returned to full production.

Certainly market watchers would do well to keep an eye on Alberta for all of the reasons mentioned above.

Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.

Related reading:

Sid Rajeev of Fundamental Research: Very Bullish on Oil

Marin Katusa Talks Oil Market Trends at Canvest 2015

Scotiabank’s Patricia Mohr Predicts Spring Rally for Oil Price