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- North American production, including volumes from Western Canada, is projected to increase by +2.85MM barrels per day by year end 2020
- Western Canadian production is forecasted to grow by +271M barrels per day by year end 2020, driven by gains in the Alberta oil sands
- Incremental Canadian production struggles to reach U.S. and Gulf Coast markets as pipelines are constrained, crude-by-rail options are congested, and planned infrastructure projects are stalled, leading to price differentials between WCS/WTI to open to over $25/bbl, their widest levels since 2013
- Line 3 replacement and expansion the most likely project to create more takeaway capacity
- Crude-by-rail volumes to the U.S. have the potential to grow upwards of 450,000 barrels per day, but rail operator resources are limited
- Waterborne imports of heavy crude grades at the U.S. Gulf Coast will continue to be pushed out by increasing deliveries of Canadian crude
Western Canadian production is forecast to exceed takeaway capacity, causing major system constraints until additional pipe capacity as early as Q4 2019
Total crude supply from Western Canada currently sits at about 4.5MM bpd, with output forecasted to exceed 5MM bpd in the next couple of years. This growth in production presents a problem, as existing takeaway infrastructure is currently at capacity and in many cases the lines have been apportioned. Available storage capacity is filling up quickly, and crude-by-rail movements have seen a slight uptick in reaction to the region being under piped, but until Line 3 and other planned pipeline projects are brought into service, more crude-by-rail movements are necessary to alleviate the crude bottleneck in Western Canada.
WCS/WTI price differentials have widened to over $25/bbl, the largest margin since 2013
During the last quarter of 2017, price differentials of Western Canadian crude began to slip from the $10-15 margin they had generally held since Jan 2015. A few things contributed to the price collapse; the Keystone pipeline outage, and the aforementioned takeaway capacity conditions in the other lines out of Alberta.
In November 2017, Keystone was shut down after a leak was detected in the line. Flows were resumed about 2 weeks later, but at a reduced pressure level, and has continued to run at those lower capacity levels ever since. At the same time, Alberta inventories added more than 7MM barrels into storage (AER). Add to that the backlog of the restricted flows through Keystone pipeline, and we have all-time high storage levels in Alberta, currently at about 68MM barrels.
This leaves the need for additional takeaway capacity, crude-by-rail, which in theory provides a quick solution and flexible volumes to be transported to market.
Crude-by-rail volumes are near all-time highs, but can railroads handle the logistics of the needed capacity
In Western Canada, about 1,000,000 barrels per day of crude-by-rail loading capacity was developed to handle the growing supply, driven primarily by gains in the Alberta oils sands. The majority of that capacity has been idled for the last few years, as pipelines have been able to handle deliveries of Alberta production to market. CP and CN, the two major rail operators in the region, have turned their focus to movements of other commodities such as grain, which has limited the resources available to serve the once again growing crude by rail market. Rail operators are weary of long-term contracts, and they certainly haven't shown much interest in monthly spot deliveries.
Given the growing supply of production from Western Canada, rail will be need to take up to 450,000 barrels per day, which we are currently approaching about half of that. On the surface, it seems plenty of capacity exists to accommodate the increased need, but whether or not rail operators make it happen both logistically and contractually remains to be seen.
Canadian barrels have slowly been displacing other foreign crudes in U.S. Gulf Coast markets, and up to an additional 800,000 barrels per day will need to be accommodated by 2020
Just 4 years ago, Canadian heavy crudes only accounted for 8% (~100,000 barrels per day) of total heavy crude imports into the U.S. Gulf Coast. Canadian barrels have been slowly chipping away at the market share of other countries that have historically had a grip on a large portion of the Gulf Coast market. That percentage has been on a steady climb to just over 22% (~420,000 barrels per day) and according to the most recent data from the EIA, has recently topped heavy imports from Venezuela.
PADD 3 in general has been the only region that has significantly increased its consumption of Canadian barrels. Given the favorable price differentials of WCS at the Gulf Coast, thanks in large part to the growing supply from the north, we expect Canadian heavies to continue to displace a portion of like grades from Venezuela and Mexico.