Investors looking for short sell ideas or hedges against long positions in crude oil need to look north as Canadian crude oil prices plunge to a record low, now about $35 per barrel, relative to U.S. crude. This gap between Canadian and U.S. prices is wider than ever and means bad news for Canadian oil and gas producers like Canadian Natural Resources (CNQ) , Suncor (SUN) and Cenovus Energy (CVE) , with CNQ being the worst performer for the year, down 12%. We therefore have a negative view of these stocks.
Brent oil prices have surged above $85 a barrel and West Texas Intermediate (WTI) now trades around $75. But in Alberta the key benchmark, the Western Canada Select (WCS), is stuck at around $35 a barrel. The record low is due to reduced capacity at U.S. refineries and a spike in production from new large oil-sands projects like Suncor's Fort Hills mine, which have saturated Canada's pipeline system.
The prolonged decline in WCS prices is mainly a consequence of a shortage of pipeline capacity. Canada's oil industry has been struggling with an inability to build new pipeline infrastructure long before Permian Basin producers in West Texas had the same problem. And just like in the Permian, Canadian crude oil production continues to rise.
According to a Scotiabank report, these discounts will remain in place until Enbridge's (EMB) Line 3 enters service in the latter half of 2019, though it will likely take the completion of either the Trans Mountain Pipeline or TransCanada's (TRP) Keystone XL pipelines by 2020 or later. EMB recently received a crucial permit from the state of Minnesota, through which the pipeline will traverse, even though state regulators have questioned the need for the pipeline. Environmental groups affected by the pipeline have vowed to show strong resistance to the replacement and construction of Line 3. This reminds us of the protests against the Dakota Access Pipeline a few years ago.
As for the Trans Mountain Pipeline, the in-service date for the planned expansion has been pushed back. The latest project status indicates the pipeline expansion to the West Coast will not only cost 26% more, but will be in service a year later than previously expected (now the end of 2021).
To make things worse, U.S.-based refineries shut down for maintenance in August and September, which was an unpleasant surprise for Canadian oil companies as those refineries process heavy oil from Alberta. One of the refineries still shut down is BP Plc (BP) Whiting Refinery in Indiana, which is the single largest consumer of Canadian heavy crude in the U.S. The outages are a short-term problem, but nonetheless are causing a significant drop in demand for Alberta's oil.
On the winning side of the equation this wide differential has boosted U.S. independent refiners PBF Energy (PBF) and HollyFrontier Corp. (HFC) , which are up 45% and 35% for the year, respectively.
