FOR Canadian heavy oil producers the new regulation limiting the amount of sulphur allowed in shipping fuel couldn't come at a worse time as it could extend - or worsen - the biggest price decline in five years.
As surging production runs up against limited pipeline space, Western Canada Select's discount to West Texas Intermediate (WTI) widened to US$31 a barrel in August from an average of $13 a barrel last year, Bloomberg data showed. The larger discount is needed to incentivise shipping by rail.
While the pipeline bottleneck is expected to ease up next year, the UN's International Maritime Organisation rule that goes into effect in 2020 will keep heavy crude at a discount of $31-$33 a barrel against WTI, according to a July report by the Canadian Energy Research Institute (CERI), reported Bloomberg.
'We think you get a double whammy effect' in 2020, said IHS Markit director Kevin Birn. 'You have prices set by rail and compounding that is the IMO' rule.
Under the new rules, ocean-going ships globally will be required to use a fuel that has 86 per cent less sulphur. The resulting increase in demand for lighter crude will push more crude towards the complex North American refineries that currently turn heavy Canadian oil into higher-value fuels such as gasoline and diesel, putting downwards pressure on heavy crude prices, according to CERI.
There's still reason for optimism, however, as diminishing heavy oil production from strife-torn Venezuela and Mexico could help raise prices for Canada's crude.
As surging production runs up against limited pipeline space, Western Canada Select's discount to West Texas Intermediate (WTI) widened to US$31 a barrel in August from an average of $13 a barrel last year, Bloomberg data showed. The larger discount is needed to incentivise shipping by rail.
While the pipeline bottleneck is expected to ease up next year, the UN's International Maritime Organisation rule that goes into effect in 2020 will keep heavy crude at a discount of $31-$33 a barrel against WTI, according to a July report by the Canadian Energy Research Institute (CERI), reported Bloomberg.
'We think you get a double whammy effect' in 2020, said IHS Markit director Kevin Birn. 'You have prices set by rail and compounding that is the IMO' rule.
Under the new rules, ocean-going ships globally will be required to use a fuel that has 86 per cent less sulphur. The resulting increase in demand for lighter crude will push more crude towards the complex North American refineries that currently turn heavy Canadian oil into higher-value fuels such as gasoline and diesel, putting downwards pressure on heavy crude prices, according to CERI.
There's still reason for optimism, however, as diminishing heavy oil production from strife-torn Venezuela and Mexico could help raise prices for Canada's crude.