Midwest Refinery Turnarounds Widen WTI-WCS Spread

By Published On: May 13, 2013

Western Canada Select (WCS), a heavy-sour crude-oil blend produced primarily in Alberta and delivered to Port Hardisty for export, traditionally has traded at a discount to West Texas Intermediate (WTI), the light-sweet varietal that trades primarily at the hub in Cushing, Okla., and underpins futures contracts traded on the New York Mercantile Exchange. Denser and more viscous than light crude oil, heavy varietals require additional processing to refine them into usable products such as gasoline and diesel.

The price spread between WTI and WCS has averaged USD16 per barrel since 2008. But in fall 2012 and early 2013, this differential ballooned, peaking at USD42.50 per barrel on Dec. 14, 2012.

Source: Bloomberg

This anomaly reflected temporary midstream and downstream capacity outages, not a durable trend.

In late October and early November, TransCanada Corp (TSX: TRP, NYSE: TRP) reduced throughput on its Keystone pipeline, which transports oil from western Canada to Illinois, to investigate whether the system had sprung a leak. Fellow midstream operator Enbridge (TSX: ENB, NYSE: ENB) likewise announced that an excess of demand had forced the firm to ration capacity on one of its pipelines that stretches from western Canada to the Midwest.

Meanwhile, BP (LSE: BP, NYSE: BP) curtailed operations at its refinery in Whiting, Ind., for maintenance and repairs prior to a planned expansion of the facility that will come onstream in mid-2013. Designed to process lower-quality grades of crude oil, this facility refines large volumes of imported WCS.

Although the WTI-WCS spread has narrowed considerably in 2013, a rash of maintenance-related refinery turnarounds in the second Petroleum Administration for Defense District (PADD 2) have caused this price differential to increase in recent weeks.

Source: Energy Information Administration

Operators had been running these facilities at elevated utilization rates to take advantage of favorable spreads between the price of heavy crude oil sourced from Canada and refined products. However, refinery utilization in the Midwest dipped to a one-year low of 82.7 percent during the week of April 12.

Source: Energy Information Administration

Calumet Specialty Products Partners LP (NSDQ: CLMT) ExxonMobil Corp (NYSE: XOM), Flint Hills Resources and Northern Tier Energy LP (NYSE: NTI) have all temporarily curtailed operations at Midwest refineries for maintenance, repairs and upgrades. Investors should expect this headwind to abate in the back half of the year.


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