Photo by: Bloomberg
JOHANNESBURG (miningweekly.com) – The Alberta/Canadian crude market is the only one in the world currently in backwardation, presenting opportunities for investors, Auspice Capital Advisors has pointed out in a research note.
The Calgary-based company explained on Friday that the backwardation reflected that the country’s future price of oil was expected to be lower than the current, or spot, price, while every other crude oil market worldwide had oil in contango – the future price of oil was expected to be higher than the spot price.
The backwardation was positive for those investors with long-term exposure to oil; they would not lose money as the market rolled over time. “As such, if they have a view of a rising oil price, this will enhance that return versus detract from it, as in the case of contango,” Auspice advised.
To take advantage of the backwardation in the short term, the company recommended that investors look at the Canadian Crude Oil Index exchange-traded fund (ETF). This was a new ETF provided by Auspice that offered investors direct access to Canadian crude pricing.
Alternatively, investors could consider selling West Texas Intermediate (WTI) ETF, if looking to hedge out WTI, while institutional traders should look at short futures.
However, “it is not normal for Canadian oil to be backwardated and all others [to be] in contango”, Auspice noted in a statement.
The backwardation was owing to supply and demand issues and was an “extremely rare occurrence”, the company added.
Auspice explained that in Alberta, a lot of supply was lost during May and June owing to seasonal upgrader turnarounds and forest fires, which brought down bitumen processing temporarily, adding that "US-based Petroleum Administration for Defence Districts 2 and 3 refiners are running very strong".
Auspice added that there were many unknowns in Alberta, which may not be positive for the province.
Therefore, investments were in question and less demand or more supply were forecast in future, said Auspice. This could partly be because of the narrowing basis to WTI, since it had made Canadian oil more expensive on a North American basis.
Canada's international bank Scotiabank economics and commodity market specialist VP Patricia Mohr said on Monday that while global economic conditions remained lacklustre, international oil prices had lifted off bottom and the supply disruptions in Western Canada’s oil patch had pushed up domestic netbacks.
“May and June have seen an extraordinary narrowing of the discounts on Western Canada’s light and heavy crude oil off WTI – the North American benchmark – a trend which will continue into July,” she said.
Alberta was currently the primary supply and service hub for Canada's crude oil and oil sands.