Heavy discount narrows as rail restrictions seen as limited

Canadian heavy crude’s discount versus U.S. benchmark West Texas Intermediate (WTI) crude narrowed on Monday, as traders said the impact of new rail restrictions was likely to be limited.

Western Canada Select (WCS) heavy blend crude for March delivery in Hardisty, Alberta, settled at $16.75 per barrel below WTI, according to NE2 Canada Inc, slightly narrower than Friday’s settle of $18.05 under.

Canada said last week it would impose temporary speed limits on trains hauling dangerous goods after a Canadian Pacific Railway Ltd crude oil train derailed and caught fire.

The restrictions will likely have a muted impact on rail shipments to the U.S. Gulf Coast and have a bigger impact on shipments to Irving refinery in Saint John, New Brunswick, since the route covers a higher segment within Canada, one trader said.

“Concern has cropped up that recent tightness may in turn lead to lower rail shipments and thus higher discounts once again, but at current levels we’d peg the spread between Houston and Hardisty within rail cash cost bounds at about $13.50 per barrel,” Tudor Pickering Holt & Co analysts said in a note.

“With inventories reportedly continuing to draw, challenges could be behind the WCS market as we head into turnaround season (for both upstream and downstream), with pipe capacity adds expected to continue to trickle in and more consistent rail on track,” the analysts said

Light synthetic crude from the oil sands settled at $4.15 below WTI, narrower than Friday’s settle of $4.30 under.

Global oil prices fell to their lowest level since December 2018 on Monday on weaker Chinese demand in the wake of the coronavirus outbreak and as traders waited to see if Russia would join other producers in seeking further output cuts.

The spreading coronavirus outbreak will hit the Canadian economy, in particular the tourism sector, supply chains and the struggling oil industry, Finance Minister Bill Morneau said on Monday.

Morneau told a business audience in Calgary that prices for crude – one of Canada’s major exports – had dipped by 15% on lower demand since the outbreak started in China.