How does Western Canadian Select oil pricing work?

Western Canada's oil price woes are often illustrated by references to the Western Canadian Select benchmark crude oil price.

Alberta Premier Jason Kenney over the weekend released a tweet warning WCS is "now trading at negative prices," with an illustration showing the price as minus one cent US.

The reality is much more complicated, according to NE2, a physical oil brokerage and derivatives exchange with operations in Calgary and Houston. NE2 says it handled deals involving about 38 per cent of western Canadian oil production in 2019. Here's the firm's explanation of how it all works.

What is Western Canadian Select?

WCS is a crude oil blend created with oilsands bitumen at the Hardisty, Alta., marketing hub.

Only four firms produce WCS — Canadian Natural Resources Ltd., Suncor Energy Inc., Cenovus Energy Inc. and Repsol — but other local crude blends are priced based on WCS, so its influence extends beyond its usual volume of 350,000 to 400,000 barrels per day.

How is WCS traded?

Trading for commodities such as crude oil operates based on contract prices, typically for delivery in a given month. The case of WCS is slightly more complicated: buyers agree to pay a price based on a discount to North American benchmark West Texas intermediate oil (to account its for being farther from market and of lower quality).

WTI is typically quoted as a flat price per barrel for near-month delivery.

But when calculating the discount on WCS for the producer, it's based on the "calendar month average" WTI price instead of the daily price.

During April, for example, the WTI futures contract (that's the oil price you read in the news) is quoted for May delivery for most of the month, but later switches to June delivery for the last week or so. The WCS price is based on the average of all of the WTI contracts signed in April, so it includes both May and June WTI prices.

All of which is to say, the calculation is a bit more complex than back-of-the-envelope math.

Did WCS really trade at a negative price per barrel on Sunday?

Probably not, but we won't know for sure until April 30.

The negative WCS price was apparently calculated by subtracting the WCS differential from the daily WTI price.

But the average for WTI in the month to date was $24.70 US per barrel. Minus the differential of about $14 US leaves about $11 US per barrel for WCS. Not great — but not negative.

Is it possible for WCS to trade at a negative price?

Yes it is, if the differential is higher than the average price. In the current case, that wouldn't be known until the end of the month.