Crushing blow for oil sands as US production, inventories reach 20- and 30-year highs

The price oil sands producers receive fell to $44.92 a barrel below the international benchmark on Thursday.

Canadian crude took a triple hit:

US benchmark Nymex West Texas Intermediate (WTI) oil fell to its lowest level this year of $91.60.

At the same time the US crude discount to the global oil price in the form of North Sea Brent widened to $19.40.

To top it all off, the spread between WTI and Western Canada Select – a blend of heavy oil sands crude and conventional oil first introduced in 2005 – widened to $25.50.

Brent settled at $110.15 in Europe which translates to an effective price for bitumen-derived oil of only $66.10 a barrel.

Canadian crude isn't selling for so little because crude from Alberta's oil sands is of inferior quality – the price of Maya heavy oil in Mexico sold in the US Gulf is of similar quality to WCS but is priced above WTI.

The reason Canada's oil is being sold at close to breakeven point for high-cost bitumen producers is because the only customer – over 99% of Canadian exports end up in the US – is awash with oil.

US Energy Information Administration data released today showed American oil inventory rose 1.1 million barrels to its highest level for February since records began in 1982.

At the same time US domestic production is rocketing.

According to new figures from the EIA US crude oil production exceeded an average 7 million barrels per day in November and December 2012, the highest volume in 20 years.

By some estimates the US is on course to up production to 11.6 million bpd over the next 10 years, all but eliminating the need for imports.

To make matters worse, even though it relies on the US to buy everything it exports, Canada is also ramping up production.

Total Canadian output is forecast to reach 4.7 million bpd by the end of the decade, an increase of 1.7 million bpd from 2011.

The increase will come almost entirely from the oil sands which is expensive to extract, upgrade and refine.

Without finding new customers for its crude which pay global rates, Canada is destined to be priced right out of the market.

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Image courtesy of Royal Dutch Shell, Athabasca oil sands, Alberta Canada.