According to Analyst Matt Murphy of Tudor Pickering Holt & Co., while the headlines have focused on the falling value of the Western Canada Select (WCS) price, WCS is a blend of heavy, sticky bitumen and the light oil needed to dilute it so it can flow in a pipeline.
On Thursday last week, WCS fell to $19 a barrel, amounting to $52 a barrel below the benchmark U.S. West Texas Intermediate price. But, at the same time, Murphy says the light oil used as a diluent for the bitumen was selling for $63 a barrel.
This means the bitumen part of the WCS barrel was actually “fetching between negative 11 cents US and negative 28 cents US per barrel,” says Murphy, according to BNN Bloomberg.
What is unusual about this slide into negative territory is that this is the first time it has ever happened. Even during early 2016, when U.S. oil prices fell below $30 a barrel, bitumen was in positive territory. However, Murphy is optimistic that prices will rise.
Murphy believes that once U.S. refineries complete their fall maintenance and crude-by-rail increases, the demand for heavy oil will increase. He’s betting on the crude-by-rail option because Canada’s pipelines are at full capacity right now. He is expecting the demand for crude will increase to 300,000 barrels per day by the end of the year.
Different types of bitumen require differing amounts of diluent to flow through the pipelines. For example, Suncor Energy Inc.’s Fort Hills mine requires anywhere from 10 to 25 percent diluent, while steam-driven projects from wells need 30 to 40 percent diluent.
