Canadian crude bottlenecks are expected to ease next year with a new, although potentially delayed, pipeline expansion to the Pacific Coast, but increased Opec+ production cuts, larger volumes moving by rail and uncertainty over Venezuela crude sanction waivers are also supportive of heavy sour prices.
The start of the 590,000 b/d Trans Mountain Expansion (TMX) pipeline to the Pacific coast next year has been expected to remove slack from heavy Canadian crude volumes in Alberta and tighten its price gap to its Cushing, Oklahoma, basis and to the Western Canada Select (WCS) price at the Texas Gulf coast. In late-2023, heavy sour Canadian crude became increasingly stranded as oil sands production rose and congestion increased on export pipelines.
But the timeline seems likely to suffer another delay after Canadian regulators denied the use of a smaller diameter pipe on a short segment of the line, likely adding 55-60 days to construction. Trans Mountain has since made another plea to the regulator, warning the delay could actually be as long as two years.
The Canadian Energy Regulator attributed rejection of TMX's initial pipe variance request to concerns with the procurement process and inspection capabilities for the segment. Trans Mountain is asking for regulatory approval no later than 9 January, to avoid further delays.
Prior to the initial variance rejection decision, made in early December, TMX was predicted to start commercial deliveries in late first quarter to early second quarter, with roughly 4.5mn bl of linefill ahead of start-up.
Although the timing is less certain, the extra volumes and locational discount for Hardisty are expected to ease once TMX begins. The line runs from Edmonton, Alberta, a key hub for oil sands producers, to the docks at Burnaby, near Vancouver, in British Columbia. It will be the first Canadian pipeline in decades to offer meaningful access to international markets without crossing the US.
Crude by rail rising
Despite the delay, heavy Canadian crude discounts in western Canada tightened for January deliveries from recent lows alongside additional Opec+ production cuts. But crude shipments by rail are likely supporting Canadian domestic prices more directly. The most recent Canadian government data showed crude-by-rail exports up for the fifth consecutive month in October at 146,000 b/d, the highest since August 2022.
Railed volumes were already increasing before the WCS Hardisty discount to Houston dipped into the $15-$20/bl spread for November-December that typically makes the rail shipments viable without prior commitments.
Rail can serve as an outlet to absorb crude running into insufficient outbound pipeline capacity. Canadian crude bottlenecks resurfaced following a rise in production, as major oil sands projects wrapped up turnarounds ahead of winter. The increased output, coupled with the need for more diluent to move crude during the winter, cut spare capacity on the largest export pipelines to zero.
Canadian operator Enbridge has had to ration pipeline space on its 3mn b/d Mainline export system. The company cut 27pc of heavy crude nominations flowing through Kerrobert, Saskatchewan, for January. This was roughly the same as in December when 28pc of heavy nominations were rejected, but up from 24pc for November delivery, about 10pc in October and 3pc in September.
Increased crude supply and demand for pipeline space from Canada drove WCS Hardisty's December discount to the CMA Nymex to its widest in nearly a year at $26.50/bl during the roughly two-week trade cycle. For the January trade cycle, WCS Hardisty averaged a $20/bl discount to the CMA Nymex. The WCS Hardisty trade cycle discount to the WCS Houston US pipeline trade month average narrowed to $12.30/bl for January from about $18.70/bl for December. Indications on Wednesday put February WCS Hardisty at CMA Nymex -19.75, and WCS Houston at a discount of about $11.70/bl to that.
Producers in Canada are looking to TMX to reduce volatility in the heavy Canadian crude prices and help clear the market. Suncor recently said it would help bring the WCS discount back to the "mid-teens."
Canadian producers have been keen to find buyers outside of the US Gulf coast, as Canadian crude's dominance there has fallen with increasing Latin American crude shipments to the region.
But crude exports to Asia-Pacific through TMX could be constrained as the largest vessel class that shippers can use at the Port of Vancouver is Aframax, and these will probably be limited to 600,000 bl, given draught restrictions. Ship-to-ship cargo transfers to 2mn bl tankers are possible at Panama or in the Pacific Area Lightering zone off California. Cenovus executives expect "bumpiness" when TMX starts up and do not plan to charter vessels until the line flows at predictable rates.
Globally, heavy sour crudes are likely to continue to be supported next year by deeper voluntary Opec+ cuts for the first quarter next year, which were announced at the end of November. The fresh agreement could lead to increased commitment to full compliance, which could tighten the market by more.
Additionally, there is uncertainty surrounding the continuation of temporary US sanctions easing on Venezuelan oil, currently lifted until mid-April next year if the South American nation agreed to allow competitive elections. It is not a given that this will be renewed.
