Despite the Obama Administration delaying the approval for the Keystone XL Pipeline, exports of Canadian heavy crude oil are on the rise.
You can best see this in the price action of Canadian oil versus the U.S. benchmark, WTI crude oil.
As recently as last November, Western Canadian Select (the benchmark for Canadian oil) traded $40 per barrel below the price of West Texas Intermediate crude oil.
But that spread has narrowed drastically…
Western Canadian Select is trading at a discount of only around $18 per barrel now – rising some 60% in price since November 2013.
So what’s with the sudden bump in price? It’s all thanks to infrastructure changes in North America…
Pipelines Moving Oil
Previously, Canadian crude simply got trapped in storage facilities in the Midwest with nowhere to go. Thus the low prices for the oil.
However, a major chokepoint – from the U.S. oil hub in Cushing, Oklahoma to refineries on the Gulf Coast – was alleviated. TransCanada (TRP) opened a 700,000-barrel-a-day southern portion of the Keystone, called the Gulf Coast Pipeline.
Plus, another major pipeline – stretching from the Chicago region, via Cushing, to the Gulf Coast – will open this summer. The pipeline, owned by Enbridge (ENB), will carry 585,000 barrels of crude per day, mainly from Canada.
Add to that the approximately 150,000 barrels a day of Canadian heavy oil now moving by rail to the U.S. refineries. One such refinery in Whiting, Indiana is owned by British Petroleum (BP). After upgrades, this refinery can now take up to 260,000 barrels a day of heavy oil.
In short, with new pipeline paths and the continued increase in trains carrying crude oil reducing the clogs in North America’s energy system, Canadian oil is now able to get to more U.S. refiners.
And that’s all without the Keystone Pipeline.
Two Oil Producers Set to Win Big
The clear beneficiaries here are the long-suffering Canadian oil producers.
The S&P TSX Capped Energy Index, an index of Canadian energy stocks, is up in excess of 15% so far this year.
These stocks are outperforming their U.S. peers for the first time since 2009. The Dow Jones U.S. Oil & Gas Index is up about 6.5%.
Take Suncor Energy (SU), for instance. It’s one of the largest oil sands producers in Canada, and it counts Warren Buffett among its shareholders. Since Buffett’s investment into Suncor was revealed in August, the stock is up about 21%.
And Canadian Natural Resources (CNQ) is the largest heavy oil producer in Canada – not to mention the country’s second-largest natural gas producer. The company nearly tripled its Q1 2014, year-over-year net earnings, as revenue soared more than C$600 million. (So it shouldn’t be surprising that the company’s stock is up about 22% year-to-date.)
Bottom line: With the opening of new pipelines and increased rail shipments, Canadian heavy oil producers should continue to benefit. Perhaps even to the extent that Canada tells the United States exactly where it can stick the Keystone Pipeline!
And “the chase” continues,