​OPEC cuts hurt US refiners but help the oilsands

Reduced OPEC oil exports to North America are benefitting Canadian crude exporters, while putting pressure on U.S. Gulf Coast refinery margins, according to financial information services firm Fitch Ratings.

As supplies of lower priced heavier crude blends with higher sulphur content exported by OPEC have waned, the key price differential between benchmark light Western Texas Intermediate (WTI) crude and heavier crude blends entering the U.S. market has narrowed.

About 60 percent of oilsands production is currently marketed as a WCS-like product, while the remaining 40 percent is upgraded into higher value products, according to data from the Alberta Energy Regulator.

The differential between WTI and Western Canadian Select, the benchmark for Canadian heavy crude, has shrunk to about $10/bbl from the $15/bbl range earlier this year as U.S. crude inventories contracted to 483 million barrels on July 26, down from 532 million barrels in April, according to the U.S. Energy Information Administration.

This crude inventory reduction occurred despite U.S. shale production ramping up to 9.4 million bbls/d compared with 8.8 million bbls/d at year end 2016.
As stronger heavy oil prices benefit Canadian oilsands and heavy oil producers, they also cut into the profit margins of U.S. Gulf Coast refiners.

Valero Energy, CITGO and Phillips 66 and other Gulf Coast refiners that have invested into coking capacity to convert heavier crude oil into gasoline and other refined products depend on heavy crude feedstock and benefit from a wide spread between WTI and heavy blends.

The narrow differential is a welcome development for Canadian heavy oil producers and could get even better in the near-term if the Trump administration blocks imports from Venezuela, which predominantly exports heavy crude to the U.S.

Over the longer term, however, Fitch Ratings doesn’t expect the narrow differential to last.

“The Fort Hills project (194,000 bbls/d of bitumen) is expected online later this year. Increased pipeline capacity from Canada into the U.S. should also contribute to an easing of spreads.”

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