Light-Heavy Oil Differential Widened In November
As Canadian producers earned record prices for light oil in November,
the differential between light and heavy prices widened dramatically.
With world oil prices remaining above $30 (U.S) a bbl,
refiners Imperial Oil Limited, Shell Canada
Limited, Suncor Energy Inc. and
Petro-Canada
posted
an average price of $52.46 per bbl (Cdn.) for Edmonton sweet light crude last
month.
In contrast, the price paid for Imperial Bow River heavy crude averaged only $30.95. The $21.73 per bbl differential, based on Imperial light and
heavy postings, was up from $18.35 per bbl in October and $9.53 in September.
For the first 11 months this year, Bow River crude averaged $35.77 a
bbl compared to a par price of $44.68.
The rapid increase in the differential appears to be
more the result of near-term demand issues rather than increased heavy crude
production, according a report by HSBC Securities (Canada) Inc.
The firm forecast the differential will peak in the fourth quarter and begin to narrow by late in the
first three months or early in the second quarter of 2001.
One reason for the wider differential is likely the poor season for
asphalt, a major destination for much of Canadian heavy oil, said the HSBC
report. High oil prices combined with high electric power prices in California
increased residual fuel demand and resulted in a 71% increase in asphalt
prices. In response, municipal and state governments were forced to curtail
paving programs, bringing about an "early and abrupt" end to the paving season, the report said.
With a substantial amount of deferred paving activity, there is likely
some pent-up demand, said HSBC. While the brokerage said firm data is hard to
obtain, indications are that inventories are considerably higher than in 1999,
reducing the incentive to stockpile heavy oil.
A high heating oil crack spread is also contributing to a wider lightheavy differential, the study suggested. The crack spread is the difference
between what a refiner will receive for a bbl of end products and the price of
oil.
Distillate inventories in the United States are down 19.4 million bbls
(14.4%) from 1999 levels. In the U.S. Northeast, the largest heating oil
market, inventories are at 57% of last year, HSBC said. The shortfall has
driven up the spread, making it more profitable for refiners to run lighter
crude streams. Refiners with upgrading capacity will pay less for heavy crudes
to offset not only the increased cost of upgrading, but the foregone profits
from not running a lighter stream, the report said.
The HSBC report suggested a third factor in the rapid run-up in the
differential is the threat of supply interruptions this winter, resulting in
backwardation, which results in lower futures than current prices. As a
result, there is little incentive for refiners to stockpile heavy oil.
If purchasers are to be persuaded to buy it, the current price of
heavy oil must be lower than the future price to pay for carrying costs. Given
the steep backwardation in the West Texas Intermediate strip (just under $30
(U.S.) per bbl in June 2001 compared to $34 this month), near-month differentials must be extremely wide to achieve that objective, the report said.
In forecasting a turnaround in early 2001, the HSBC analysts said with
the end of winter, much of the speculative premium should come out of distillate prices, easing crack spreads and light-heavy differentials. The winter
build for asphalt inventories will begin as refiners prepare for next summer's
paving season.
A severe winter could also help as it should reduce natural gas inventories, which bodes well for summer residual fuel prices, the report said.
Adequate asphalt stores, it said, allow refiners to better meet a strong summer residual fuel demand.
Gas prices also achieved record levels in November. AECO-C hub spot
prices averaged $7.43 per gigajoule, up nearly $1 from $6.47 a month earlier.
AECO prices have averaged $4.56 a gigajoule year-to-date, an increase of more
than 63% from $2.79 in 1999.
New York Mercantile Exchange
near-month prices rose to $5.76 (U.S.)
per mmBtu in November and closed yesterday at a record high of $7.43. So far
this year, NYMEX near-month prices have averaged $3.94 per mmBtu.
On the world oil market, West Texas Intermediate near-month futures
averaged $34.28 (U.S.) per bbl in November for an 11-month average of $30.41.
Brent Blend was $32.44 per bbl for the month, while Saudi Light and WTI cash
averaged $32.06 and $34.46 respectively. Year-to-date, Brent, Saudi and WTI
cash averaged $28.82, $27.57 and $30.47 per bbl respectively.
Light-Heavy Differential Jan.-Nov. 2000
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