Canada Markets

We often talk about the grain pipeline in our industry. As an exporter of grains, Canada's success is highly linked to the pipeline or the movement of grain from a producer's bin, through a handling facility, by rail to an export terminal and onto an ocean-going vessel. I've long-looked-forward to the de-regulation of cereal marketing on the Prairies, as we now have more people lying awake at night trying to figure out how to streamline the pipeline, or to move our grain more efficiently and at a lesser cost. Talks of Canadian grain currently loading through terminals in New Orleans and the Pacific Northwest are a testament to this.

Fortunately, it's not the grain pipeline that's making news coast-to-coast in Canada these days, although troubling just the same. Lack of pipeline capacity to move western heavy crude oil to export markets is making headlines across the country and is an issue for our federal and provincial governments, and also for Canadians in general.

The attached chart indicates the significance of the issue. The top chart shows the March Brent crude (in blue) along with the March West Texas Intermediate (black) while also plotted with the Western Canadian Select Crude (green), all in United States dollars per barrel. The middle study indicates the spread between Brent Crude and WTI crude oil. The bottom study indicates the spread between WTI and Western Canadian Select Crude.

The Americans look at this middle study and lament about the loss of significance of the WTI on the world stage. The WTI traded at a premium to Brent crude until late 2010, when Brent took the lead as U.S. inventories grew due to U.S. production levels moving towards what is now 20-year highs. Interviewed in the Wall Street Journal's Marketwatch, DTN senior analyst Darin Newsom suggests "The activity in the Brent/WTI spread indicates where issues are occurring. If Brent is strengthening against WTI, global issues are at play. If the strength is seen in WTI, most likely domestic supply and demand has taken charge."

It's the domestic supply that remains the current problem. A glut of oil at Cushing, Okla., the futures delivery point for WTI, has led to weakness in U.S. crude oil prices. James Williams, energy economist at WTRG Economics, suggests that WTI lost its status as a global benchmark, because "production north of Cushing increased beyond the downstream refinery capacity to refine it."

Efforts have been made to lower inventories in Cushing, with the most recent move being the reversal of flow of the Seaway pipeline to move 400,000 barrels per day from Cushing to refineries in the Gulf. Additional projects should see this flow increase to one million bpd by the end of this year. Of course, Canada is proposing the Keystone XL pipeline to flow product south, the Northern Gateway pipeline to move product to the world market off the coast of British Columbia, while talks are in place to reverse the flow of an eastern pipeline which would allow western crude to flow to eastern Canadian refineries, where some 700,000 bpd is currently imported to satisfy eastern Canadian needs, all at the inflated prices based on Brent crude pricing.

Western Canada currently faces challenges on every front in terms of having these pipelines built, while current spreads, as indicated on the chart, are creating enormous budget challenges within western provincial governments which will in turn spread to impact the finances for the entire country.

Only time will tell how this scenario will play out, although it would appear the "peak oil" theorists may be facing an uphill battle in selling their story for the time being.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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