Commodities Investors: Avoid Canadian Oil Sands Stocks Until Transportation Issues Are Ironed Out

The recent announcement of Canadian Pacific Railway (TSX:CP)(NYSE:CP) that it would not ship crude from Canada’s oil sands into the U.S. has caused the WCS-WTI spread to widen.

| More on:
The Motley Fool

The crazy disparity between the price that Western Canadian Select (WCS) crude is sold at compared to the price U.S. producers are able to achieve via fracking and “tight” oil production (WTI crude) has widened to epic proportions this week. On Tuesday, a barrel of WCS oil traded at $33.57, while WTI was trading at US$64.75.

That massive chasm, which has been created out of a lack of transportation capacity from the oil sands to U.S. refineries, appears to have been exacerbated in recent days after news that one of Canada’s largest railroads, Canadian Pacific Railway (TSX:CP)(NYSE:CP), announced that it would not be a “stop gap” measure for the Canadian oil sands and was instead seeking long-term strategic partners that would sign on for much longer periods of time to provide stability to the company.

With CP having some of the best fundamentals of any railroad out there, perhaps this was a negotiating move. After all, forcing companies in the Canadian oil sands to sign on for rail capacity for longer than the three years that are expected for new pipeline capacity to come online is a prudent move. If companies agree to continue to ship via rail (a more expensive and dangerous method for the environment, surprisingly) for, say, 10 years, or however long a contract CP would need to continue shipping crude, this could be a huge win for both the oil sands in the near and medium term, as it resolves periodic transportation capacity issues, and CP, as it would provide the company with the contract length it needs to make this deal viable.

This rejection by CP is also indicative of the fact that CP appears to be very focused on delivering loads on time for its existing customers; it appears that adding on crude to its existing rail schedule may disrupt the flow of other goods by producers and sectors that have partnered with the railroad for decades, and the railroad may not have sufficient capacity to meet the needs of the oil sands at this time.

Bottom line

Whether Canadian oil sands companies agree to sign on for longer rail contracts or not, the future does not look bright for producers at current WCS prices. I would avoid the entire sector until some sort of semblance of a solution to this scenario is worked out and producers can once again receive a reasonable price for their heavy oil from U.S. refiners.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

More on Energy Stocks

Nuclear power station cooling tower
Energy Stocks

Why Shares of Cameco Are Powering Higher

Cameco (TSX:CCO) shares have surged more than 400% in the last five years alone, with more growth on the way.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »

You Should Know This
Energy Stocks

Brookfield Infrastructure Is Up 9% After Earnings: What Investors Need to Know

A large-cap stock with a low-risk and strong revenue profile is an investment opportunity for income, growth, or both.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 No-Brainer Energy Stocks to Buy Right Now for Less Than $500

Here are two rallying Canadian energy stocks you can buy today with attractive dividend yields and growth potential.

Read more »

edit Businessman using calculator next to laptop
Energy Stocks

Could This Undervalued Stock Make You a Millionaire One Day?

It's been a long wait, but Ballard Power finally seems to be gaining the kind of momentum that's game changing.

Read more »

calculate and analyze stock
Energy Stocks

Here’s Why it’s Not Too Late to Buy Brookfield Renewable Stock

BEP (TSX:BEP.UN) stock shares surged on earnings, but part of it was due to even more growth on the way…

Read more »

Solar panels and windmills
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Looking for a bargain? Here are three in the renewable energy sector.

Read more »

Golden crown on a red velvet background
Energy Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Looking for dividends? I wouldn't count on Enbridge stock (TSX:ENB) forever. But there's another that's been a proven winner.

Read more »