The benchmark price of Canada’s oil sands is expected to strengthen next year amid lower supplies of Mexican heavy crude oil to the United States, BMO Capital Markets said in a report carried by Bloomberg.
Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—has seen its discount to WTI Crude at around US$10 a barrel in recent months, even after Canadian oil producers restored most of the production they had curtailed in April and May, when oil demand and oil prices were crashing in the pandemic.
According to BMO Capital Markets, the discount of WCS to WTI could narrow to between US$5 and US$7 because of expected significant cuts of Mexican heavy crude flows to the United States. With Mexican heavy crude supply low and Venezuela’s heavy crude banned for U.S. refiners because of the sanctions on Nicolas Maduro’s regime, Canada’s oil sands are set to benefit from the lower availability of heavier grades for U.S. refineries in the Midwest and the Gulf Coast.
Mexico’s state oil firm Petróleos Mexicanos (Pemex) expects the exports of its flagship heavy crude grade to slump by nearly 70 percent over the period 2021 to 2023, sources with knowledge of the situation told Bloomberg. The large decline in Mexican heavy crude exports is seen as a result of continuously declining oil production in the country and the need to divert crude flows to the future US$8-billion refinery, Dos Bocas, which Mexican President Andrés Manuel López Obrador wants built in his home state of Tabasco.
Due to the lower Mexican crude supply, U.S. refiners in the Midwest will make sure they have enough Canadian oil supply and “will bid heavy oil away from the Gulf Coast market to ensure they have enough supply,” BMO Capital Markets said, as reported by Bloomberg. This could lead to higher prices for Canadian oil and a narrower discount of the oil sands benchmark to WTI, according to the bank.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com