USGC heavy crude prices may remain under pressure until Canada's Trans Mountain expansion enters service

Record-low differentials for heavy crudes that compete on the US Gulf Coast may not rebound until the Trans Mountain pipeline expansion enters service and diverts Canadian sour barrels away from the US and toward Canada's West Coast, traders and analysts say.

The Trans Mountain expansion is expected to add an additional 590,000 b/d of takeaway capacity in late 2023 from the Alberta oil sands to British Columbia. Increased flows to Canada's western coast may alleviate a surge of heavy Canadian crude exports to the USGC that accelerated late last year following expansions to the Enbridge Mainline, and the reversal of the Capline pipeline.

"The start-up of the Trans Mountain expansion will provide relief to the distressed Western Canadian barrels as differentials will shrink in three to six months to about $10/b" discounts to WTI, said veteran Canadian crude watcher Greg Stringham, a former vice president at the Canadian Association of Petroleum Producers. Stringham said vessels will likely ship the additional Trans Mountain flows equally to Asia and California.

Western Canadian Select at Hardisty, Alberta averaged at a $20.07/b discount to Cushing WTI during the third quarter, widening from a $12.81/b discount in Q3 2021, Platts assessments show. Platts is a unit of S&P Global Commodity Insights.

S&P Global has a similar view, forecasting that the additional outlet and takeaway capacity for growing Western Canadian supply may support firmer Canadian heavy differentials on the USGC after the Trans Mountain expansion enters service. S&P Global sees Western Canadian crude supply, or production plus diluent, growing more than 300,000 b/d over 2022-2023.

Canadian oil sands producer MEG Energy also expects narrower price discounts, CEO Derek Evans said Nov. 10 on an earnings call.

But MEG, which shipped nearly 66% of its total production in third quarter 2022 to the USGC through pipelines from land-locked Alberta, will have an option to increase that figure to 80% utilizing the 20,000-b/d capacity it has booked on TMX, the company said in statement.

Currently, MEG utilizes its option to ship 100,000 b/d of its Access Western Blend blend to the USGC utilizing its capacity on the Flanagan South and Seaway pipeline systems, with the remainder being sold to the Edmonton market, it said.

In the USGC, the company also has access to 1.4 million barrels of crude storage in Freeport, Texas and also contracted dock space at the Beaumont Terminal that provides an option of one Aframax loading each month, it said.

Pipeline flows to rise

In the short term, S&P Global expects pipeline flows into the USGC from Canada to rise, as refineries in the US Midwest are already saturated with Canadian crude, which makes up about two-thirds of the region's crude slate. Additional volumes are expected to flow beyond the Midwest towards the USGC for refining or re-export.

One international crude trader based in Houston said the Trans Mountain expansion will put a price floor on heavy USGC barrels.

"Right now, there is no floor," he said.

Latin American crude prices are among the hardest hit by increasing competition from Canada. Platts last assessed Colombia's heavy Castilla blend at discount of $16.60/b to the Latin Brent futures strip, up slightly from a record low of minus $17/b, the widest since Platts begun assessing Castilla in January 2013. Platts assessment of heavy Canadian barrels on the USGC reached a record low on Oct. 17, when WCS at Nederland, Texas, widened to WTI CMA minus $21.35/b, the weakest in assessments going back to February 2016.

"I don't think we're going to see anything change soon," a Colombia-based trader said of the weak differentials.

Increased Canadian pipeline flows to the USGC started in the fourth quarter of last year, when the Enbridge Line 3 replacement project added 370,000 b/d of takeaway capacity to the Enbridge Mainline. At the same time, a reversed Capline pipeline started shipping Canadian heavy crude from Patoka, Illinois, to St. James, Louisiana. Heavy Canadian flows on Capline, which is owned by Marathon and Plains All American, are estimated between 100,000-200,000 b/d.

Canadian crude exports to the US Gulf Coast have averaged around 784,000 b/d this year through August, according to the Canada Energy Regulator, up from an average of 656,958 b/d exported to the USGC in 2021.

Pipeline operator Enbridge said in a recent earnings call it also sees the Trans Mountain expansion as diverting flows away from its Mainline. The Mainline is now "essentially" full and should remain that way at least through the first half of 2023, when volumes may decline with the Trans Mountain Expansion project targeted to be in service in late 2023, Liquids Pipeline President Colin Grueding said Nov. 4.

"We may lose 10% for a few years, but volumes will pick up with growth in the Western Canadian Sedimentary Basin," Grueding said.