By Nia Williams
(Reuters) – The Trans Mountain oil pipeline expansion (TMX) was intended to narrow the discount on Canadian oil, but the difference after three months is wider than when the project began commercial operations.
Many analysts had predicted that the difference between Western Canada Select (WCS) and U.S. crude would gradually narrow to single digits, thanks to the additional 590,000 barrels per day (bpd) of export capacity provided by TMX.
But instead, WCS for delivery in Hardisty, Alberta, is trading about $15 per barrel under benchmark West Texas Intermediate (WTI) oil, versus $11.75 per barrel under U.S. crude on May 1, the first day of commercial operations. WTI has fallen below $74 per barrel in recent weeks.
Oil companies in Canada, the world’s fourth-largest producer of crude oil, have for years struggled with production exceeding available space on export pipelines, creating a crude oil bottleneck in Alberta. The start of TMX means Canada finally has spare pipeline capacity, but the expected price increase has not materialized.
On earnings calls last week, Cenovus Energy (NYSE:) and Canadian Natural (NYSE:) Resources Ltd, both major shippers on TMX, blamed a number of factors.
These include increased competition on the US Gulf Coast from heavy crude imports from Mexico and the shutdown of US refineries, including ExxonMobil’s (NYSE:) Joliet, Illinois, 251,800 barrel per day plant, which took most of its units offline after power outages following a tornado last month and has not yet fully restarted.
Still, company executives remained optimistic that the WCS discount would decrease in the coming months.
“I would say for the foreseeable future we expect Trans Mountain to continue to have the intended impact in Alberta and the differences will be as small as they have been in a long time,” said Geoff Murray, executive vice-president of commercial at Cenovus. .
“The biggest thing around Trans Mountain is that we’ve seen the facility come online. It’s operational, it’s functioning and it’s functioning well.”
RBC Capital Markets analyst Greg Pardy said pipeline outflows from Western Canada appeared to be going smoothly.
“The biggest fly in the ointment may be increased inventory levels in certain US regions, but only time will tell,” he wrote in a note to customers.
Weak demand from major sour crude consumer China also weighed on heavy oil grades globally, said Rory Johnston, founder of the Commodity Context newsletter, adding that expectations that Trans Mountain’s expansion could impact WCS would significantly reduce differences, were exaggerated.
“The key value of TMX was not really a low WCS differential, but rather a much lower chance of another differential breakout, which we still won’t see here even if we are back above $15,” Johnston said.
Before TMX’s creation, Canadian producers were vulnerable to congestion on export pipelines, which occasionally caused WCS “blowouts” where the discount dropped to more than $40 per barrel below U.S. crude, costing them millions of dollars in revenue.
