2013 November 22

The Master Resource Report 2013-11-22

The Canadian Problem

The Canadian oil producers are trying to find a way to close the huge gap between what they get paid for their oil and the global price of this critical commodity.

According to an article in the Financial Times the gap between Western Canadian Select and comparable benchmarks now stands at more than $20 per barrel.

Western Canada Select, the regional benchmark for low quality, viscous heavy oil, is trading at extreme discounts to other regional blends. It is selling for $63 a barrel this week compared with $86 for similar heavy, sour crude from Mexico and $94.50 against West Texas Intermediate, the US oil benchmark.

Compared to the Brent benchmark the gap is even wider at nearly $45 per barrel. There is even a nearly $10 per barrel discount to the North Dakota Sweet crude price as noted last week on this web page.

The loss to the Canadian producers and Canadian economy is huge. With over 2 million barrels of exports a day the $20 per barrel discount results in more than $40 million per day or over $1 billion per month in lost revenue.

This is simply too much money that is being lost to logistic constraints and geography. It will find its way to the market. The question is whether it will be by pipeline, train or mule train. Ok maybe not mule train.

Last Week’s Thought For The Day?

Last week I asked if producers in the Bakken were selling their precious oil too cheaply at the $71 price.

Here is a comment I received from Tom:

I think this question should be asked much more broadly, about every fossil resource…. Why do we, as a society, rush to use any such resource quickly when we know scarcity will make it more valuable in the future?

Jeremy Grantham would probably point out that this is one of the biggest flaws in capitalism as it operates today. Hard to quantify externalities and environmental cost are ignored in the short-term calculations of returns and the need for cash flow to service debt.

No Report Next Week – Thanksgiving Holiday