West Canadian Select price on US Gulf Coast hits new high
Price differentials for heavy, sour Western Canadian Select on the US Gulf Coast have reached their highest levels on record as Albertan production curtailment, Venezuelan political upheaval and OPEC production cutbacks have created a tight supply of heavy sour grades in the region.
WCS at Nederland, Texas, was assessed Monday at the NYMEX WTI CMA plus $3.50/b, its strongest ever differential, according to S&P Global Platts data going back to 2016.
Since trading at parity with the WTI CMA on February 7, WCS at Nederland, Texas, has steadily strengthened as the market reacted to the high demand and short supply of heavy sours.
Oil production in Alberta, where WCS is produced, was initially curtailed by 325,000 b/d in January after a provincial government mandate capped production at 3.56 million b/d. Since then, Alberta production levels have twice increased, to a total 100,000 b/d from the initial curtailment, in an effort to widen the differential between WCS at Hardisty and WTI.
Since curtailment has taken effect, differentials for WCS at Nederland have strengthened by $4.40/b from trading at the WTI CMA minus $1.90/b on December 28.
On Thursday, the Trump administration said it was preparing new sanctions against Venezuela. It is anticipated these would include additional oil-related sanctions and potentially moving up the deadline banning dollar transactions with PDVSA that currently stands at April 28.
Should these be put in place, WCS in the USGC is likely to continue its bullish performance. Venezuela produced 1.10 million b/d in February, 60,000 b/d lower than January, according to an S&P Global Platts survey released Thursday.
Venezuelan oil production has plummeted by 910,000 b/d since 2017 and is at its lowest level since an industry strike in late 2002 and early 2003, according to S&P Global Platts survey data. Imports of Venezuelan crude have dropped significantly over the past few years as the country’s production has waned. US Imports of Venezuelan crude in 2018 were nearly 220,000 b/d less than the over 733,000 b/d imported in 2016, according to data from the EIA.
The data shows US imports of Venezuelan crude fell precipitously in the first week of March, numbering only 83,000 b/d, down from an average of over 491,000 b/d in the three months prior to March. The ongoing power blackout in Venezuela is also expected to limit exports from the country.
Also adding to the tight market for heavy sour crudes has been the 1.2 million b/d OPEC supply cuts that took effect in January 2019, and more significantly, a decline in Saudi imports to the US. Saudi Arabia imported 491,250 b/d of crude to the US in February 2019, down from an average of
881,000 b/d crude imported in the three months prior to February 2019, according to data from the EIA. This drop-off, assuredly an effect of OPEC cuts and a Saudi focus on Asian market share, has contributed to the strength of heavy sours in the USGC.
Mars vs. WTI Midland
These factors have also boosted US Gulf Coast sour grade Mars to a premium to WTI Midland crude at the Magellan East Houston terminal (MEH) this year for the first time in more than three and a half years. The heavy, medium grade typically trades at a discount to lighter, sweet crudes on the Gulf Coast.
Mars reached a premium to MEH on January 17, when it was assessed at WTI cash plus $5.85/b, which was 25 cents/b over MEH on the same day. The last time front-month Mars was at a premium to MEH was May 7, 2015.
The two grades have tracked closely together since January, with MEH at times reclaiming its premium to Mars. However, late last week Mars once again was heard trading at WTI plus $7.40/b, about a 20 cents/b premium to light, sweet MEH. Mars has averaged about an 8 cents/b premium over the past 30 trading days. That is compared with the average $2.70/b premium MEH held over Mars in 2018.
The tight market for heavy sours has also had an impact for Latin American crudes. Last week Colombian heavy-sour Castilla Blend tenders were traded around minus $5.50-$5.00/b for April loadings compared with an average of $9.00/b traded for March shipments. Two separate tenders with Colombian medium-sour Vasconia for April loadings were heard done around minus $2.50-$2.25/b versus ICE Brent last week.
Such levels were above the average of $5.30-$5.10/b recorded for March shipments of the same grade in the tender market. As a result of the strong demand, Vasconia reached its highest level in nearly six years. Castilla Blend and Vasconia compete for business with other heavy-sour grades in the US. In January-February, imports of Vasconia and Castilla amounted 10. 3 million barrels, 17% down from 12.4 million barrels in the same period of last year.