U.S. to End SPR Releases, Boost Canadian Crude Imports

U.S. refiners are expected to import more crude oil from Canada after the Biden administration decided to end releases from the Strategic Petroleum Reserve (SPR) this fall. The move will likely increase prices of Canadian oil at a time of tight global supply. The end of SPR releases could change the market dynamics once more this year, which has been highly volatile following Russia’s invasion of Ukraine. In March the White House announced it would release 180 million barrels from the U.S. strategic reserve to help ease high prices.

As a result of the releases, the price of Western Canada Select (WCS), the benchmark Canadian heavy grade, has been affected. Because WCS has similar qualities to the sour crude that dominates U.S. reserves, it has traded at around $20 a barrel below U.S. West Texas Intermediate (WTI) crude for much of the summer. In 2021 the average WCS discount was $12.78 a barrel.

The WCS discount to WTI is expected to narrow as the SPR supply dwindles. Price of WCS is expected to become $14-$15 per barrel cheaper than WTI next year, from about $21 now.

However, increased medium sour crude production from OPEC countries such as Saudi Arabia, as well as discounted Russian Urals, could keep that differential wider.

Canada’s crude exports from the U.S. Gulf Coast have dropped in July and August to around 130,000 barrels per day (bpd), from last year’s 200,000 bpd.  Foreign buyers have turned to discounted Russian barrels, tempering Canadian crude exports.

Some market participants worry that limited pipeline capacity from Canada to the United States could cause bottlenecks. This could cause a glut in the Alberta hub, which could in turn drive down prices there.

Canada hit record production of 5.5 million barrels a day of oil in 2021, and is forecast to reach 5.7 million bpd this year.

Enbridge Inc is once again rationing pipeline capacity, in a practice known as apportionment, on its Mainline system as Canadian output has risen. That system ships the bulk of Canadian crude exports to the United States.

Apportionment fell steeply last year when the Line 3 pipeline expansion opened and stopped entirely from March until July, but Enbridge has since started rationing capacity on its Mainline again. Crude deliveries into the Kerrobert, Saskatchewan, hub were apportioned by 2% in August and 6% in September.

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