Arbitrage for Canadian crude to China opens ahead of Trans Mountain Expansion startup

Arbitrage inflows of crude cargoes into Asia, particularly heavy crude into China, could potentially see an uptick upon the commencement of Canada's Trans Mountain Expansion pipeline in second-quarter 2024 should economics remain viable, market sources said over March 21-22.

This comes as China's Sinochem was heard to have bought an Aframax cargo of high TAN, heavy sour Access Western Blend, from Canada's Suncor Energy at the equivalent discount of $5-$5.50/b to ICE August Brent futures on a delivered basis, market sources said.

The cargo would be one of the first to be shipped though the Canadian pipeline.

A source with Sinochem confirmed that the cargo was bought and will be sent to their system refineries for cracking, but did not elaborate on the price details or which of its refineries the cargo will be delivered to.

Sinochem has three refineries in eastern Shandong with a combined capacity of 400,000 b/d, as well as a 300,000 b/d of Quanzhou Petrochemical in southern Fujian province.

Some market participants thought the cargo would be delivered to Sinochem's refineries in Shandong.

"Arbitrage will open frequently after TMX really gets ready. The choice is between the [US] West Coast and Asia, it depends on who's willing to pay at a higher price," a China-based independent refiner said.

"The price was higher than that of Merey crude, which might not attract much buying interest from independent refineries producing asphalt," a refinery source in Shandong said.

Venezuelan heavy sour crudes were offered at discounts of around $8-$9/b against ICE Brent futures on a DES Shandong basis, trade sources said.

A Shanghai-based analyst said the pipeline would be a game changer to China as it could not only cut the voyage but also avoid the high freight -- caused by the Red Sea tensions -- to bring in the cheap heavy barrels from Canada, which are strong competitors to the Middle Eastern barrels.

Middle East heavy crude such as Iraq's Basrah Medium and Heavy grades are currently supported by lower term volumes of Saudi Aramco's Arab Heavy in April due to field maintenance, with one source previously expecting Aramco to cut Arab Medium supplies in May on field maintenance as well.

Basrah Medium and Heavy for April loading were last heard traded at premiums of 60-70 cents/b to their respective official selling prices on FOB basis, compared with values for Basrah Medium of up to plus 50 cents/b to its OSP, FOB, for the previous trading cycle.

Historical pipeline opening in focus

TMX, which will have a total system capacity of 890,000 b/d, will operate with 540,000 b/d of heavy crude and 350,000 b/d of light and refined product capacity.

The pipeline will stretch from Edmonton, Alberta to Burnaby, British Columbia, providing Canada with meaningful direct access to international markets for the first time in its history.

The pipeline is slated to commence its operations during the second quarter of 2024, which would provide new market access, resulting in certain Western Canadian Sedimentary Basin producers unveiling higher output in the current year.