Healthy Q2 profits expected for oilsands players due to narrower price discount for bitumen

Analysts say a dramatic narrowing in the price discount for western Canadian heavy crude in the second quarter of 2023 should mean healthy profits for oilsands producers poised to start reporting their earnings later this week.

"It's been a nice tailwind for them," said Eight Capital analyst Phil Skolnick, adding senior oilsands producers like Canadian Natural Resources Ltd., Suncor Energy Inc., and Imperial Oil Ltd. are best positioned to benefit from higher bitumen prices.

"They've had a weaker Canadian dollar too that has benefited them, so we're expecting good free cash flows."

Globally, oil prices remained under pressure in the second quarter, with the benchmark West Texas Intermediate down three per cent from the first quarter of the year and benchmark Brent crude down five per cent.

But the difference between the price of Western Canada Select (WCS) — an oilsands bitumen blend — and New York-traded West Texas Intermediate (WTI) narrowed dramatically in the quarter to an average of US$15.07, versus US$24.77 in the first quarter, according to an RBC report.

It's normal for a barrel of heavy, sour oilsands bitumen to sell for less than a barrel of higher-quality, light sweet product.

But there have been times in the past when that differential has been blown out, to the detriment of Canadian producers. For example, last fall, as the U.S. government's decision to release more oil from its Strategic Petroleum Reserve put downward pressure on prices, the WCS differential was trading for approximately US$32 per barrel less than WTI.

In 2018, when a lack of pipeline capacity out of this country led to a glut of inventory, the WCS discount widened to as high as US$50 per barrel and took a bite out of the Canadian sector's profitability.

So far in the third quarter of 2023, the WCS discount has begun to widen again. But analysts say it should narrow once the Trans Mountain pipeline expansion comes into service early in 2024.

The Trans Mountain expansion will bring the pipeline's capacity up to 890,000 barrels per day and will provide producers with the option to diversify their oil exports globally. According to an RBC report, about 97 per cent of Canada's net oil exports went to the United States in 2022.

In addition, a major new refinery is set to open later this year in Mexico — a development that will create another market for Canadian oilsands product and help to boost the price of WCS.

"We continue to believe the landscape favours heavy oil producers given the meaningful increases in refining capacity slated for 2023," said a recent Scotiabank report.

"We expect the WCS differential to continue to narrow beyond 2023."

Canadian oil and gas companies begin reporting their second quarter earnings later this week, with oilsands companies MEG Energy Corp. and Cenovus Energy Inc. set to report Thursday and Imperial Oil Ltd. reporting Friday.