Oil Price Gap Highlights Risks for Oil Sands, Report Says

The growing gap between the world's two major oil price benchmarks represents risks for Canada's oil sands because they rely too heavily on the market south of the border, a new report said.

WTI oil prices, the U.S. reference point, have lagged Brent crude prices since last August, with the gap between the two contracts widening to $10 in January, Scotiabank said in its latest Commodity Price Index report. Brent prices cover two-thirds of the world's oil.

"The wide discount for WTI oil off Brent highlights the commercial risk for Canada's oil patch of relying largely on one export market—the U.S.," said Patricia Mohr, vice-president, economics and commodity market specialist.

The spread between the two contracts hit a new record on Thursday, with the front-month March Brent contract trading in London at $98.56 /barrel, compared with $87.02 /barrel for the leading U.S. benchmark in New York. There are various reasons for the price gap, chief among them being oversupply caused by a bottleneck in Cushing, Oklahoma, the main pricing point for U.S. Oil. Prices are also rising in Europe on severe winter weather.

Efforts to build new pipelines to ship oil from Alberta to world markets have run into strong opposition from environmentalists and aboriginal groups. Oil giant Enbridge is planning a $5.5-billion pipeline that would ship 525,000 barrels of oil sands crude from Alberta to a tanker port at Kitimat, B.C. on the Pacific Ocean.

China's petroleum consumption rose by 12% in 2010, 19.1% year-on-year in December, the report said. The economy, and oil demand, is expected to grow strongly again this year, it said.

Overall, the Commodity Price Index ended 2010 on a strong note, jumping 5.5% in December from the same month a year earlier, led by the oil and gas sector.