Industry Trend Analysis - Canadian Crude To Benefit From Venezuelan Woes - OCT 2017

BMI View: Further downside risk to Venezuelan crude production will continue to support Canadian heavy crude grade differentials over the next 12 months. The potential implementation of US sanctions on Venezuelan crude imports would provide further upside to the WCS benchmark, reducing the discount to WTI.

Canadian oil exports will continue to rise through to 2018 as Venezuelan heavy crude output continues to suffer. The US will look north of the border to replace its barrels with other comparable crude grades, whilst buyers in Asia look to source heavy crude volumes as the OPEC/non-OPEC production cut continues to remove heavier barrels from the regional market. The discount of Western Canada Select (WCS) benchmark price to WTI has reduced significantly over the first half of 2017. With further downside risk to Venezuelan production and the continuation of the OPEC/non-OPEC production cuts (which has removed medium-sour grades from the market), demand for heavier Canadian grades is likely to remain strong. Gulf coast refiners in particular are geared for heavy South American crude grades, for which Canadian crude assays are a like-for-like replacement.

We maintain a bearish view with respect to crude and fuels output in Venezuela over the coming year amid looming debt obligations and insufficient oil prices. PdVSA will continue to divert funds away from the upstream sector in preparation for a USD3.43bn bond and principal repayment in Q417. This will result in a near 10.0% y-o-y drop in output, with crude production expected to average 1.96mn b/d in 2017 (see 'Crude Production: No Upside In Sight', April 18).

Discount Approaching Multi-Year Lows
WTI-WCS Spread, USD/bbl
Source: Bloomberg, BMI

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