WTI traded at a $15 discount to the the global oil price in the form of North Sea Brent, which settled at $99.06 in Europe which translates to an effective price for bitumen-derived oil of less than $60 a barrel.
The value of Syncrude, a light oil made from oil sands after undergoing an expensive upgrading process, also plunged on Monday to $8.50 below WTI after trading at a premium for most of May.
In February and early March it dropped to a record discount of more than $20 below to US crude. In July last year Syncrude attracted a premium of $18 on the back of a temporary supply shortage.
Monday's sharp drop-off and the declines last week in the price of Western Canada Select marks a reversal of steady gains made by the commodity since hitting multi-year lows of $35.75 below WTI on March 7. In September last year the discount was only $8.00.
The problems of oil sands producers are being blamed on increasing supply from Alberta where production is set to more than double to 3.7 million barrels per day by 2025 out of a total of 4.7 million for the whole of Canada. 99% of Canada's current crude exports of 2 million barrels per day end up in the US.
The lack of pricing power by oil sands players is often blamed on the fact that they cannot access new markets in Asia as pipeline projects languish in a regulatory morass.
But even if TransCanada’s (NYSE:TRP) Keystone XL finally crosses the border into Canada, Enbridge’s (TSE:ENB) Northern Gateway pipelines is built or Kinder Morgan receives approval to twin its pipeline going into Vancouver, bitumen is expensive to extract, upgrade and refine and cannot compete with the many new shale oil plays which have pushed US production to its highest level in a decade.
Production in the US particularly from the Bakken basin in North Dakota will see the country ramp up current output of 7.8 million barrels/day to 10.9 million barrels over the next few years. Bakken is also competing for pipeline and refinery contracts with Alberta.
Apart from the boom in US production, and a strong currency, Alberta's oil sands players are also threatened by escalating costs says a report by research company Wood Mackenzie released on Monday:
"Oil sands projects display some of the highest break-evens of all global upstream projects. The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects," Wood Mackenzie Ltd said in a report on Monday.
"Pure-play oil sands companies without hedges in place, such as a U.S. downstream position, are the most exposed."
According to the research "break-even costs for building new steam-driven projects are in the $65-$70 a barrel range and mining developments need at least $90-$100 oil."
In a 2011 study forecasting the economic impact of oil sands up to 2035, the Canadian Energy Research Industry said employment from oil sands would increase almost 10 times to 905,000 jobs, adding about C$2.1 trillion to the national economy, or C$84 billion a year from the oil sands alone. These figures may now begin to look too optimistic.