What is the difference between Canadian and US benchmark crude oil?

Source: Alberta Government, NEB Description: This line graph shows the prices of WTI, WCS, and the WCS minus WTI differential from January 2010 to April 2018. The average annual differential reached a high of $25 in December 2013, and then decreased. It has been increasing since November, 2017 and reached $23 in March 2018.

Between Jan. and April 2018 the differential between WTI and WCS has averaged US$22.50

Crude oil produced in Canada varies widely in quality and grade. Crude oil can be characterized as light, medium, or heavy, depending on its viscosity and sulphur content, according to the National Energy Board.

In Canada’s major crude oil producing region, the Western Canadian Sedimentary Basin, three quarters of the crude oil produced is heavy. Heavy oil is a lower quality grade than light oil because it yields less high value end products, like gasoline and diesel.

In addition, higher viscosity and sulphur content makes it more costly to refine than light crude oil.

As of 2016, Canadian had enough refineries to process a maximum of 20% of Canada’s heavy crude oil production.

The vast majority of Canadian heavy crude goes to the United States (U.S.) for refining – mostly to the Midwest, although the Gulf Coast is Canada’s fastest growing market.

The majority is transported by pipelines.

Western Canadian heavy crude oil streams have a lot of different qualities, which created problems in segregating them in storage and pipeline systems.

To simplify logistics, several western Canadian producers agreed in 2004 to create Western Canadian Select (WCS) by blending a variety of Canadian oil streams consisting mainly of conventional heavy crude and oil sands bitumen at a storage terminal in Hardisty, Alberta.

The price of WCS at Hardisty is a Canadian heavy oil benchmark. This is the approximate price Canadian heavy oil producers receive for their heavy or non-upgraded production. Hardisty is far from major refining markets in the U.S. Therefore, the price of WCS is impacted by the transportation costs associated with reaching its refining markets.

The main comparative light crude oil benchmark in North America is a light crude oil product at Cushing, Oklahoma, known as West Texas Intermediate (WTI). When comparing the two benchmarks, the combination of higher quality, and closer/better market access results in WTI having a higher price than WCS.

The difference between these two benchmark prices is referred to as a differential and, on average, WCS has been worth US$16.72 less than WTI between 2013 and 2017. Some people also refer to this as a discount.

Between Jan. and April 2018 the differential has averaged US$22.50. Oil sands production increased 5% between Jan. and March 2018, and 12% between March 2017 and 2018, but pipeline takeaway capacity has remained constant.

In general, major crude oil export pipelines have been operating at, or near, capacity for several years. This contributes to the growing differential.

The differential can be further increased by any refinery or pipeline interruptions which reduce takeaway capacity.

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