Northern Oil Might Not Be Cheap for Long: Phillips 66 (PSX), Kinder Morgan Energy Partners LP (KMP)

Canada has a problem. While it might have the world’s second-largest crude oil source, right now its oil is way too cheap. Before you start to get excited that the price might come down at the pump, I should warn you: The reason that oil is cheap is that its stuck up there. Blame the lack of pipeline capacity to take that oil to the refining marketplace. So, just how cheap is Canadian crude oil you ask? Take a look at the chart below:

Source: Enbridge (NYSE:ENB) Investor Presentation

A price differential that large — more than $40 — is causing producers to get creative to get Canadian oil to market. They need to be creative, because as tough as it is for current producers, it could get much worse. There is an impressive list of projects expected to begin production over the next few years. Among them is Exxon Mobil Corporation (NYSE:XOM)‘s massive Kearl oil sands project. The $12.9 billion project is eventually expected to produce 345,000 barrels of oil per day.

That oil, along with the myriad other production projects ramping up over the coming years, needs access to the refining market. The good news is that there are two catalysts on the horizon that, when taken together, should help provide a boost to the price of oil even as more of it starts flowing. While that might not be what your wallet wants to hear, it is better than shipping that oil to China or continuing to import it from the Middle East.

Increasing rail capacity and utilization
While Canadian producers aren’t fond of selling lower-priced crude, oil refiner Phillips 66 (NYSE:PSX) is working overtime to increase its access to this price-advantaged crude oil. For every dollar per barrel the company can save, it equates to $450 million being added to its bottom line. To help make this happen the company has ordered 2,000 rail cars to transport crude oil to its refineries. It also recently signed an agreement to have Canadian crude oil shipped by rail and then barge to its refinery in Washington State.

Source: Phillips 66