Canada Markets

Canadian Heavy Oil Trades Under $30/barrel

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The West Texas Intermediate contract traded below its March low on its continuous chart this session, while the discount faced by Canadian producers of heavy crude is also growing (middle study, blue line). The price of Western Canada Select is falling in Canadian dollar terms (lower study, red bars) despite recent pressure on the Canadian dollar. (DTN graphic by Nick Scalise)

The September West Texas Intermediate contract reached levels below its March low of $42.03/barrel on its continuous chart this session by dipping as low as $41.91/barrel. Canadian producers of Western Canadian Select heavy crude are facing a double whammy, with the discount from WTI reaching its largest level in over a year.

The crude market faces numerous challenges with growing global supplies, Iran sitting on the sidelines waiting to release supplies and China's surprise currency devaluation which may temper imports. A break below the March low of $42.03 as indicated by the horizontal blue line on the upper study of the attached chart, could leave the crude market scrambling to find a bottom. Weekly lows ranged from $32.40 in December 2008 to $34.13/barrel, the Feb. 17 2009 weekly low potentially acting as a band of support.

DTN analysis indicates other short-term challenges for this market. Seasonality charts suggest further weakness through the end of August. Commercial traders are showing bearish behavior with a growing carry between nearby futures. As well, non-commercial traders or investors have been unwinding their net-long position since the May 27 CFTC data when they held a net long of 347,991 contracts. While they were sellers today, the most recent CFTC report indicates they held a net-long position of 247,093 contracts as of Aug. 5, which suggests that further selling could lie ahead.

The double whammy faced by Canadian producers is the growing discount for heavy Western Canada Select (WCS) oil, which is trading at its highest discount in over a year. As indicated on the attached chart, the WCS spread or discount is trading at $19.90/barrel USD. This spread has narrowed from $39.90/barrel the week of Nov. 4, 2013 to a low of $7.50/barrel for the week of June 8 2015, while has since weakened 165% to $19.90/barrel, retracing 38.2% of the mentioned uptrend to the largest discount faced in a year. This is noted by the blue line in the middle study.

The lower study indicates the Canadian dollar value of the Western Canada Select oil at $29.18/barrel when valued in Canadian dollars. To put this into perspective, today's Financial Post Energy column is titled In Alberta, 30 loonies will get you a case of beer, a bottle of whiskey -- and now a barrel of oil. This price has not been seen since 2008/2009.

There is a long list of reasons for this growing spread between Canada's heavy crude and the already weak WTI prices, which includes increased production after shut-downs related to Alberta's fires, new production coming on-line, pipelines shut down due to spills and a sharply reduced production at a key Indiana refinery.

Watch for oil to continue to test the $42.03 March low, while a breach of the WCS spread at $19.88 could result in a further move to the 50% retracement of $23.70/barrel. Further weakness in WTI or the WCS spread could have negative implications for the Canadian dollar which will help mitigate the damage, but will present further challenges for the industry and overall economy.

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