Iran Conflict Tightens Sour Spreads, Boosts Demand for Canadian Heavy Crude

The discount on Western Canada Select crude oil to North American benchmark West Texas Intermediate futures narrowed by $0.30 a barrel on Tuesday, settling at $12.40 below WTI. This narrowing is attributed to the ongoing U.S.-Israeli war on Iran, which has tightened global sour spreads.

With the Strait of Hormuz closed due to the conflict, there is a structural physical deficit in heavy and sour grades of crude oil in Asia. Patrick O'Rourke with ATB Cormark Capital Markets notes that this will create demand for Canadian heavy barrels exported off the British Columbia coast via the Trans Mountain pipeline.

As a result, Canadian oil producers are well-positioned in the near-term given the supply deficit of heavy crude. Longer-term, the current crisis highlights the importance of Canadian production as a reliable and democratic supplier. However, O'Rourke cautions that Canada's ability to increase oil output remains constrained by limited pipeline export capacity.