SlavkoSereda
For March, West Texas Intermediate (WTI) oil costs ought to vary between $70 and $90 per barrel. This is a rise of $5 per barrel from final month. A narrower vary is between $75 and $85 per barrel.
For many of final month, costs have been tightly packed between the high and low $70s. Because the month wore on, costs crept larger. For March, I count on extra of the identical, simply barely larger costs.
Due to my prior work expertise with Syncrude a few years in the past once I was a part of the group that created the oil sands generic fiscal regime and since I spend money on oil equities, I at all times have an energetic curiosity in oil sands developments. One article that caught my consideration final month was a Bloomberg article “The $10 Billion Mistake That Will Revive Canadian Oil” (subscription required) by Javier Blas. One paragraph particularly stood out:
Regardless of its colossal price, TMX had two benefits that will compensate for the monetary folly. One is that it is more likely to slim the differential between Canadian and US crude, resulting in larger income for everybody concerned within the petroleum business – and that features provincial governments which take royalties. How a lot the low cost would chop is hotly debated. On common, it has averaged minus $17 a barrel between 2010 and 2024. The consensus is, that is going to development now towards minus $10 a barrel. Crucially, TMX in all probability signifies that the differential will now not endure from its perennial blowouts, when it has widened to as a lot as minus $40 and even minus $50 a barrel. Second, it ought to facilitate funding in new manufacturing, resulting in larger tax income.
Canadian heavy oil, often known as Western Canadian Choose (WCS), sells at a reduction to WTI. As seen from the quoted paragraph, this differential can differ broadly over time.
Intuitively, larger WCS costs for producers is an effective factor. However what if that producer is an built-in producer?
Built-in producers improve their crude bitumen to artificial crude oil (SCO), which generally trades at or close to the identical costs as WTI. Alberta royalties are assessed towards bitumen costs. If bitumen costs rise, then so, too, do royalties. An built-in producer, nonetheless, doesn’t get pleasure from elevated revenues as a result of its revenues are dependent upon its closing product, SCO. In different phrases, its intermediate product, crude bitumen, has elevated in worth and requires the next royalty fee, whereas its closing product nonetheless sells for WTI costs.
For these wanting extra data on the oil sands royalty framework, I refer you to the Alberta government website: “Oil sands royalties – Overview.”
WCS is completely different from crude bitumen in that diluent has been added to crude bitumen. The tip end result, although, is that bitumen is extra priceless than it was earlier than the change in differentials.
A non-integrated producer or bitumen solely producer may have larger revenues, royalties, and earnings. Built-in operations, although, may have larger royalties, similar revenues, and thus decrease earnings.
Returning to the principle subject, I count on WTI costs to remain usually inside $75 to $85 per barrel, with a further $5 on both aspect for any minor excursions.
Editor’s Be aware: The abstract bullets for this text have been chosen by In search of Alpha editors.
