The widening spread between Western Canada Select and Brent could weaken the Canadian dollar, according to an analyst at Nomura Securities Co. Ltd.
“We continue to expect the Canadian dollar to underperform other currencies this year,” Charles St-Arnaud wrote in a note to clients, adding that the American greenback could be trading at $1.10 before the end of the year.
Western Canada Select, the country’s heavy oil benchmark, had clawed its way back to within $25 per barrel of Brent crude earlier this year, after trailing as much as $65 in the past year. Surging rail shipments had helped Canadian crude secure market access, narrowing the differentials between Brent, WCS and North America’s major West Texas Intermediate benchmark.
But prices between the three blends are widening once again, as Brent rises on Middle East troubles, while the two North American benchmarks fall on higher production.
Canadian oil output rose from 3.7 million barrels per day in May to 3.8 million bpd in June, according to the International Energy Agency, accounting for much of the increase in North American production.
Even as production rises, Western Canadian Select heavy oil has weakened to a three-month low as plants that use the grade are expected to shut down for maintenance next month.
Two Alberta upgraders, or plants that convert heavy oil into higher quality light synthetic grades, are set to be taken down for maintenance in and around September, lowering the amount of crude they will consume, Bloomberg reports.
In addition, the amount of oil being transported by rail in North America peaked in May, while the Lac-Mégantic train tragedy in early July led to an even bigger decline in the transport of oil by rail, Nomura’s St-Arnaud estimates.
The rail tragedy has led to calls for more stringent crude-via-rail regulations that may mean a rise in cost of transportation, as rail companies comply with new rules.
“The continued increased supply of oil and the decline in the amount transported by rail means that Canadian oil once again has to mainly flow through pipelines, recreating some of the conditions that led to the widening of the oil spread back in November and December last year,” Mr. St-Arnaud said
Source: Financial Post / Bloomberg