Heads Up. Subject: Market Update - March Differentials
Although many of you are likely already aware, we felt it important to send an update on prices for March as it will have a significant impact on netback values. Differentials for all Western Canada and North Dakota crude grades have dropped sharply relative to WTI. This is primarily due to exceptional growth in production achieved from a favorable winter drilling season, coupled with lower demand from Mid-continent (PADD 2) refiners, and reduced refining capacity on the West coast.
Typically, Cushing provides enough of a backstop to absorb production over and above refiner buying, but the supply/demand gap for March has far exceeded the pipeline capacity to Cushing.
This essentially leaves two scenarios:
1)The current differentials we are trading at, which reflect the point at which refiners will switch commodities and run the discounted barrels (primarily sweet and light sour)
2)Production moves via rail out of the traditional markets and to the coast (East, West, Gulf) where it can attract discounts to Brent as opposed to WTI.
Capability by rail is very limited as cars are scarce and on backorder by 18-24 months, so it is difficult in the immediate term to make a significant impact. Trafigura has been, and continues to work on securing cars and loading options to help reduce exposure to the PADD 2 pricing, but this is becoming more difficult and costly every day.
Approximate indications for March production at the close today are as follows:
WCS Heavy: WTI - $32US/bbl
Edm Sweet: WTI - $23
LSB Cromer: WTI -$24.50
Condensate: WTI +$7.25
It is important to be aware for budgeting and cash-flow projections for March, but also to note the potential for this to continue through the coming months. It will take a significant change to the supply/demand imbalance to bring differentials back towards historical norms.