U.S. oil refining companies haven’t seen times as good as these since at least the middle of the previous decade. Over the past couple of years, refiners with access to cheap domestic oil have enjoyed solid profit margins and strong earnings, which sent share prices skyrocketing last year.
And with new pipelines providing increased access to those refiners located along the U.S. Gulf Coast, the good times should keep rolling, as more and more cheap crude keeps rolling in. But that’s not all. In their quest to boost margins further, several U.S. refiners have their sights set on oil being produced by our neighbors up north.
Canadian crude, which is of a different quality from oil produced in American shale plays, is one of the cheapest types of oil you can find anywhere. And refiners are doing anything and everything they can to get a piece of the action.
Why Canadian crude is so cheap
It’s worth emphasizing just how cheap Canadian heavy crude has become, even in comparison with domestic crudes like those produced in the Bakken. In the first week of January, the price of Western Canada Select, the benchmark for heavy crude extracted from Canadian oil-sands bitumen, dipped to nearly $40 per barrel below NYMEX West Texas Intermediate (WTI).
Even WTI’s discount to Brent, the global crude oil benchmark, which topped $20 a barrel in early February, pales in comparison. So why exactly is Canadian oil so cheap? There are a couple of important reasons.
One of the biggest reasons is that Canadian oil has to compete with American oil for what limited pipeline capacity that currently exists. Growing crude volumes from Alberta’s oil sands and the Saskatchewan Bakken often end up losing priority to growing volumes from North Dakota’s Bakken shale and supply sources in the Rockies, for instance.
Another reason is that Canada relies heavily on one major export market — the American Midwest. Instead of seeking foreign export markets, a whopping 98% of Canadian crudes are destined for the United States. With the aforementioned lack of pipeline infrastructure, compounded by the delay of the Keystone XL pipeline, Canadian oil producers find themselves uncomfortably levered to a market already inundated with oil extracted in its own backyard.
Refiners seeking Canadian crude
As with any profit-seeking company, U.S. refiners are cognizant of the massive disparity between Canadian crude and other grades of crude commonly used as feedstock. Many are actively seeking ways of capitalizing on this unprecedented price arbitrage opportunity.
Marathon Petroleum Corp (NYSE:MPC) is one of them. The Ohio-based refiner recently finished up an expansion of its Detroit refinery, where it increased capacity by 13% to 120,000 barrels per day. The primary objective of the expansion is to capitalize on rising production from Canadian oil sands.
Tesoro Corporation (NYSE:TSO) is another refiner actively scouring for ways to transport more Canadian crude to its refineries along the American West Coast, where the vast majority of its operations are located. CEO Greg Goff recently said the company is contemplating shipping Canadian crude to the U.S. Pacific Northwest via barges, and then moving it via rail to its refineries in California.