What Happened to the Price of Western Canadian Select?
Western Canadian Select (WCS) is currently trading at less than half that of West Texas Intermediate (WTI) and trending down even as WTI continues its rise.
The last time we saw a gap like this was in December of 2017, when diminished pipeline capacity prevented Alberta oil from getting to market (CBC News). At that time, the gap grew to $25 per barrel. Now it is over $40, and the trend is worsening.
What Happened On July 16?
(Images via: https:/oilprice.com/oil-price-charts)
Was it because Trump was in Helsinki cozying up to Putin while threatening $250 billion in tariffs against China? Or because the Bank of Canada had raised its benchmark rate for the first time in 6 months? Nothing so sinister as a conspiracy, this turns out to be a simple case of supply and demand. On the supply side, the Edmonton Journal’s Geoffrey Morgan reported on July 24 that Canadian oil sands producers Suncor and Imperial were bringing their joint venture back online after a power outage in the end of the second quarter, while other large cap producers were completing maintenance. Recently, the Fort Hills operation staged its grand re-opening, although it had been ramping up production since January. On the demand side, CBC reported that a major refinery in the US shut down this summer for planned maintenance.
With existing pipelines still operating at sub-optimum levels, the stockpile of oil has been growing. Rail has not been able to take up the slack, and new pipeline capacity, Enbridge’s Line 3, won’t be on line until next year. The decision on Trans-Mountain is not good news in this scenario. With such depressed pricing, how much longer will spending continue in the oilsands, and if they start dialing back the cash flow, how long will it be before our service industry starts feeling the pinch?
What should you do to prepare for the inevitable bump in the road?
- Look for short-term opportunities in alternative industries where your capital investment in equipment and facilities can bring value to customers in other segments of the market. Logging is going up. Agriculture is expecting a payday following harvest (although there are a lot of crops still on the field). Governments are still mid-way into their fiscal year and may have money for infrastructure and maintenance.
- Don’t discount the old expression, a penny saved is a penny earned. Look internally to optimize processes and improve efficiency. At 10% net margin, a dollar saved can match more than $10 in revenue, so as your sales slump your earnings can actually go up if you can find new ways to economize and find efficiencies.
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