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Canadian heavy crude oil prices were put through the ringer between mid-August and mid-September

Movements in both prices and the price differential were wide and fast, so much so that both improved rapidly over the period.

The prior widening of the light-heavy crude oil price differential in July and early August was driven by a significant improvement in field supplies from both increases in expanded projects and the return of forest fire–disrupted volumes, running up against softer demand in the U.S. due to unplanned refinery outages. The result was a price differential that was knocking on the door of US$20/bbl in mid-August and threatening to go higher.

By mid-September, relative calm appeared to have returned with the price differential more in line with what market fundamentals would suggest. The differential returned to what we would consider a more normal range under US$15/bbl. What triggered such a rapid correction? Effectively the opposite of what pushed the differential wider a month previously surfaced to tighten it once again.

Refinery outages, including one at a significant consumer of Canadian heavy oil in the U.S., have restarted. On the supply side of the equation, an outage at Nexen’s Long Lake SAGD project, impacting about 50,000 bbls/d, occurred in late August. This time the outage was not a technical issue, but rather ordered by the Alberta Energy Regulator. Although some pipelines from Long Lake have since returned to service, heavy oil supplies were still being impacted at the time of writing. A larger outage at the Syncrude plant due to a fire, although not directly affecting the supply of heavy crude oil into the market, did affect overall crude oil supply availability, helping to tighten up the market for all Canadian crude oil.

Going forward, we think the light-heavy price differential can hold at or under US$15/bbl. Seasonally improving trends on the demand for crude oil through October will be taking place as the refinery maintenance season begins to wind down.

Despite structurally higher heavy oil supply in Canada by the end of this year, a renewed increase in the railing of crude oil to the market should help to keep the price differential tighter. Given the general higher availability of both pipeline and rail transportation capacity than in the past, we think this greater transportation capacity will effectively place a ceiling on the price differential near its recent highs of US$20/bbl.