By Nia Williams
The Trans Mountain oil pipeline expansion (TMX) was meant to shrink the discount on Canadian oil versus U.S. crude, but three months in, the differential is wider than when commercial operations on the project started.
Many analysts had forecasted the differential on Western Canada Select (WCS) versus U.S. crude would gradually narrow to single digits thanks to the extra 590,000 barrels per day (bpd) of export capacity offered by TMX.
But instead, WCS for delivery in Hardisty, Alberta, is trading around $15 a barrel below benchmark West Texas Intermediate (WTI) oil, versus $11.75 a barrel under the U.S. crude on May 1, the first day of commercial operations. WTI has declined in recent weeks to less than $74 a barrel.
Oil companies in Canada, the world’s fourth-largest crude producer, have struggled for years with production outpacing the space available on export pipelines, causing crude to get bottlenecked in Alberta. TMX’s start-up means Canada finally has spare pipeline capacity, but the expected boost to prices has not materialized.
On earnings calls last week, Cenovus Energy and Canadian Natural Resources Ltd, both major shippers on TMX, blamed a number of factors including increased competition on the U.S. Gulf Coast and U.S. refinery outages. Even so, company executives remained optimistic that the WCS discount would start to narrow in the coming months.
RBC Capital Markets analyst Greg Pardy said pipeline egress out of western Canada appeared to be running smoothly. “The main fly in the ointment may be elevated inventory levels in select U.S. regions, but time will tell,” he wrote in a note to clients.
Weak demand from major sour crude consumer China was also weighing on heavy oil grades globally, said Rory Johnston, founder of the Commodity Context newsletter, adding that expectations that expanding Trans Mountain would significantly narrow WCS differentials had been overdone.
“The main value of TMX wasn’t really a low WCS differential but rather a vastly lower probability of another differential blowout, which fingers crossed we still aren’t going to see here even if we’re back above $15,” Johnston said.
Prior to TMX’s start-up, Canadian producers were vulnerable to congestion on export pipelines occasionally triggering WCS “blowouts” in which the discount plunged to more $40 a barrel below U.S. crude, costing them millions of dollars in revenues.
Analysis:
The Trans Mountain oil pipeline expansion has not led to the expected narrowing of the discount on Canadian oil compared to U.S. crude. Despite additional export capacity, the differential has widened, impacting oil companies and producers in Canada. Various factors, such as competition on the U.S. Gulf Coast and refinery outages, have contributed to the situation. While there is optimism for a potential decrease in the discount in the future, the current challenges highlight the complexities of the global oil market and the impact of infrastructure projects like TMX on prices and revenues.