Canadian heavy oil is cheaper than a pint of beer as North American fuel demand drops

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CALGARY – While the commuters are staying at home and locking orders are spread across the United States, the price of Canadian heavy oil has plummeted.
Western Canada’s benchmark heavy oil price index fell 30.5% on Thursday to US $ 6.45 per barrel on Thursday, analysts joke within a pint of beer. US crude prices fell 7.7% to $ 22.60 US per barrel.

“The prices are so low that there is no point in transporting if you don’t have to. If you can move it to storage, you will, “said Stephanie Kainz, senior partner at RS Energy Group, a division of Enverus based in Austin, Texas.

However, Canadian producers who are able to transport their barrels directly to refineries on the U.S. Gulf Coast via existing pipelines were able to take advantage of higher prices, almost $ 16 US per barrel, as refineries Americans still want Canadian heavy oil, despite declining fuel demand.

“WE. Refiners that can process heavy acid crudes have historically improved their margins by importing Canadian crudes at a price lower than the benchmark prices of West Texas Intermediate in North America, “analysts at Moody’s Investors Service wrote in a report on Thursday. , which said refiners’ prospects are negative for the next 12 to 18 months.

Similar pricing dynamics are evident at the pump, as a large part of the Canadian population works from home.

GasBuddy data shows that the cheapest place to buy gasoline at retail in Canada right now is the little hamlet of Walsh, Alberta. on the Trans-Canada Highway, just west of the Saskatchewan border, where fuel can be purchased for 48 cents a liter.

A refill in Edmonton, which is home to three oil refineries, would cost 54.9 cents per liter – a price that reflects how the province’s oil producers have no choice but to park their oil in storage and d ‘expect better prices. In Toronto, gas is 57.9 cents per liter, while the cheapest price in Vancouver is 96.9 cents per liter, according to data from GasBuddy.

Since oil is worth much more in the future than it is today, also known as contango, Rory Johnston, managing director and market economist at Price Street, a Toronto-based market research company, said he expects hedge funds and oil traders to start again finding tankers to use as floating storage “because this trade is now open.” ”

“As long as you can store oil over the course of the year for less than $ 10, you’re basically printing money right now,” said Johnston.

There are currently more than 30 million barrels of oil stored in tanks in Alberta, more than 75 percent of the total oil-producing province’s capacity of 40 million barrels, according to a report released this week by Rystad Energy. , who predicts “the country is a few days away from running out of available storage capacity. ”

Rystad predicted that national oil companies will have to cut production by 11%, or 440,000 barrels per day, given the limited storage.

Alberta Premier Jason Kenney said earlier this month that the province is ready to use tougher production quotas to guarantee a “survival price” to local oil producers.

“The government is closely monitoring the current economic situation affecting the energy industry, as well as COVID-19, and will evaluate other options,” said Kavi Bal, press secretary to the Minister of Energy of Alberta, Sonya Savage, when asked if the government would tighten production limits. .

The United States, Canada’s only oil market, is also experiencing a significant contraction in demand.

IHS Markit predicts that gasoline demand in the United States could drop 4.1 million barrels a day, or more than 50%, as U.S. states respond to the coronavirus crisis.

“The magnitude of the decline in gasoline demand will be much greater than the impact of the 2008 recession – and could be extended depending on the effectiveness of social distancing measures to control the spread of the COVID-19 virus” , Jim IHS Markit, vice president Jim Burkhard said in a report released Thursday.

As long as you can store oil over the course of the year for less than $ 10, you’re basically printing money right now

Rory Johnston, General Manager, Price Street

The coronavirus pandemic has caused demand for suburban fuels such as gasoline to collapse to the point where the wholesale price for a gallon of gasoline in Chicago is only 20 cents per gallon. “A banana at this level is worth more,” said Patrick De Haan, head of petroleum analysis at GasBuddy in Chicago.

“We have seen demand drop, but I don’t think we have ever seen prices drop as significantly,” said De Haan. “We are preparing for a drop in demand for gasoline that we have never seen before. Without a doubt, every day that we continue like this, we are talking about a situation where the supply (of oil) exceeds the demand by 15 to 20 million barrels. ”

Data from the U.S. Energy Information Administration shows that crude oil inventories in the United States increased by 1.6 million barrels last week to reach 455.4 million barrels of crude oil in stock.

These figures imply that only 200 million barrels of crude oil storage space remains empty in the United States, but there is an incentive for more oil producers to store their crude, said Kainz of RS Energy.

“Everyone is rushing to get to storage and take advantage of this contango curve – put that oil in storage for later,” said Kainz.

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