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Why Canadian Crude Is the Cheapest in the World

Canadian crude prices are at their lowest levels against Brent-priced crude in 10 months, reaching a new market low on Friday and trading last week at under $50/barrel.

This is less than half the price of international Brent-priced crude. Why?

•    Refining capacity isn’t evolving fast enough
•    Supply is increasing
•    Pipeline capacity is a bit tight

On Friday, West Canada Select has fallen $5.50 to a discount of $42.50/barrel. A key reason for this was the announcement by BP Plc (BP/) that it would delay a project to run ore heavy oil at its Whiting refining in Indiana for at least three months

BP’s project aims to convert a heavy crude processing unit with a 225,000-barrel/day capacity to enable 420,000 bpd capacity for processing Canadian crude. Originally, that was to be completed in the first half of 2013. The timeline has now been pushed to the second half of 2013.

Refining is a problem for Canadian crude. Production has picked up, but refining capacity lacks the same evolutionary momentum.

Pipeline capacity also has investors worried.

Canada’s Imperial Oil Ltd is now preparing to launch operations at another new oil sands site—Kearl—and is expecting to produce another 110,000 bpd of bitumen. This bitumen doesn’t need to be refined. It goes straight to the pipeline. Production should begin in January. Will there be enough pipeline capacity? Kearl’s addition to the flow will definitely make things tight.

Even in mid-November, Enbridge was saying its pipelines were already pretty much full.

According to the Globe and Mail, analysts have estimated that Canada could run out of export pipeline room sometime between 2014 and 2018. Enbridge seems to think that time is already upon us. The pipeline operator also thinks that there won’t be any boost in capacity until the end of next year—at the earliest. This could mean a serious cut in profits due to backed up oil.

So right now, while production is steadily increasing, the game is all about finding new ways to market—not only for Canadian crude but increasing volumes coming out of North Dakota.

It’s clear, then, why Canada is so desperate to see the beleaguered Keystone XL pipeline clear the remaining hurdles in the US.

But there’s always an investment gem to be dug up under these heavy surfaces. Keith Schaefer, published of the specialized Oil and Gas Investments Bulletin, says that while the rising oil sands production is causing discounts for other Canadian oil producers, there is one exception to this rule—and it’s a good one.

In his latest missive, Schaefer notes that there is “one small group of producers selling their product for $14/barrel above WTI. It’s the single most valuable hydrocarbon in all of North America—not just Canada [and] it’s wildly profitable […] trading closer to Brent pricing than anything else in North America”.

The clincher is that it’s not oil—it’s natural gas.

This piece originally appeared on OilPrice.com and has been reproduced here with permission. 

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