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US SPR Release Is Creating A Problem For Canada’s Heavy Crude Oil

Tyler Durden's Photo
by Tyler Durden
Friday, Jun 10, 2022 - 01:00 AM

By Julianne Geiger of OilPrice.com

The Strategic Petroleum Reserve release in the United States - a large one designed to release a million barrels per day from storage into the commercial markets - is creating a bit of a problem for the Canadian oil industry.

All crude oil grades aren’t equal, and a large share of what the SPR is releasing into the Gulf Coast area is heavy sour crude - a similar grade to the oil shipped down from Canada.

The heavy Mars and Poseidon grades—both hailing from the GoM area and both heavy grades—are getting lost in the sea of heavy crude flooding the market from the SPR. So is Western Canadian Select (WCS)—the Canadian crude oil that traverses pipelines from Hardisty, Alberta, to the U.S. Gulf Coast.

The WCS discount to the U.S. crude benchmark West Texas Intermediate (WTI) is now the steepest in years at $20 per barrel.

“It’s not great timing,” Rory Johnston, founder of the Commodity Context newsletter based in Toronto, told Reuters. “The vast majority of what’s coming out of the SPR is medium sour crude. It’s hitting directly at that marginal pricing point for WCS.”

Canada is no stranger to battling steep discounts—also referred to as wide spreads—compared to U.S. crude oil. For several years, their lack of pipeline capacity into the United States created a situation where all their pipelines were full, and the bottlenecking in this midstream segment created a pricing situation most unfavorable to Canada.

By 2020, Canada had increased its storage capacity and slacked crude oil production, which dragged up the price of WCS—and shrunk the gap between WCS and WTI. Compared to today’s steep $20 discount, June 2020 contract pricing for WCS was just $3.80 per barrel.

For those thinking that the steep discount to WTI means the SPR is working to bring down crude oil prices, that is not the case. As of Thursday morning, WCS was trading at $108.01—nearly double what it was trading this time last year.

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