This week, the Canadian government agreed to purchase Kinder Morgan’s Trans Mountain pipeline to ensure the expansion goes ahead. While there is a lot of criticism from environmental and indigenous groups and conservative politicians and pundits, we believe this is a big win for our economy.
As we have written about previously, Edmonton’s commercial real estate market is positively correlated to the price of oil. If that wasn’t clear before 2015, it only took a plunge in oil prices and the subsequent provincial recession to prove how closely the two are tied.
Accordingly, we have written extensively about West Texas Intermediate (WTI) prices, but we haven’t drawn as much attention to Western Canadian Select (WCS), which is a heavy blended crude oil predominantly produced in Alberta. And while it’s seldom quoted in the news, WCS is a more accurate price to use when referring to the province’s oil industry. In addition to WCS prices being a key metric for Alberta, the spread between the two (often referred to as the Heavy Crude Discount or Heavy Crude Differential) is also important to watch.
So while WTI prices have been rising steadily over the past year, look at the difference between WCS and WTI from June 2017 to March 2018.
Over the course of those 9 months, WTI rose steadily, while WCS fell dramatically. While there are many factors influencing the futures values of these respective commodities, we suspect the cancellation of TransCanada’s Energy East coupled with the political uncertainty of Kinder Morgan’s Trans Mountain pipeline played a large role in the widening spread of the two.
According to the charts below, WTI prices were up over 40% from June 2017 to April 2018, yet WCS was up less than 15% (and all of WCS’s growth came in the past couple of months).
The heavy crude discount was in full effect during this time, with the spread between WCS and WTI ballooning from $9.38 to $25.78 in April.
Prices have continued rising through the spring, and fortunately the spread is closing. Over the past calendar year, oil prices have risen roughly 50%. Noted again though, the media is likely quoting West Texas Intermediate prices (or possibly Brent Crude). Western Canadian Select, by comparison is up a more modest (but still impressive) 30% over the same time frame. The Heavy Crude Discount has also narrowed a bit to ~$22, which is better than it was in April, but still much worse than it was last year.
The political and environmental opposition of having a nationalized pipeline will still unfold over the coming months (and years!), but the Trans Mountain pipeline will ultimately allow Alberta’s oil to reach other markets than the US. In theory, the access to new markets should help narrow the Heavy Crude Discount and allow the provincial economy and local real estate market to better benefit from rising oil prices.
There’s a reason this pipeline has been deemed to be in Canada’s national interest.
West Texas Intermediate front-month futures are currently hovering around $68 / barrel (USD), while Western Canadian Select front-month futures are around $46 / barrel (USD).
Western Canadian Select (WCS) is a heavy crude oil stream which originates from Western Canada. It is comprised of existing Canadian heavy conventional and bitumen crude oils that are blended with diluents. The production stream for WCS comes from Canadian Natural Resources, Cenovus, Suncor Energy and Talisman (now Repsol). The majority of WCS is exported from Alberta to the United States Midwest for refining. With the opening of the Enbridge’s Flanagan South pipeline and available rail transportation capacity, more Canadian heavy barrels are reaching the U.S. Gulf Coast market (source: Alberta Government)
Information has been obtained from sources deemed reliable but is not warranted to be so. Information contained herein is our sole opinion and does not represent the views or opinions of any company, group or organization and should not be construed as real estate or investment advice. See our full disclaimer here.
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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