An increasingly tighter supply of heavy crude will in all likelihood help Canada’s oil industry weather the unfavorable effects of the so-called IMO 2020 rules, which stipulate a much lower allowable level of sulfur in bunkering fuel.
The new rules envisage a maximum of 0.5 percent sulfur content in the fuel used by maritime vessels versus 3.5 percent. The benchmark Western Canadian Select has an average sulfur content of more than 3.5 percent as opposed to the very light West Texas Intermediate, whose sulfur content is below 0.5 percent. However, it seems that demand for Canadian crude is not exactly restricted to just bunkering fuel.
S&P Global Platts’ Pat Harrington wrote this week that the combined effect of U.S. sanctions against Venezuela and Iran have significantly changed the demand and supply picture for heavy oil, and this is benefiting Canadian producers.
The U.S. stopped importing any Venezuelan oil earlier this year as a result of the sanctions, but since U.S. refineries still needed heavy oil to produce fuels, they increased imports from Canada. The four-week average for the period to July 12 stood at 3.585 million bpd, according to the latest Weekly Petroleum Status Report of the Energy Information Administration. Within that four-week period, Canadian crude oil imports hit a record-high of 3.945 million bpd in the first week of July.
In support of the positive trend for Canadian crude despite the looming change in bunkering fuel emissions regulations, Bloomberg reported last week the discount of Western Canadian Select to WTI had shrunk to the narrowest since April thanks to a surge in oil-by-rail exports. Oil-by-rail is the only way for some oil producers in Canada to export their crude as pipelines cannot accommodate all of the oil, even with the obligatory cuts imposed on Albertan producers by the NDP government last year. Related: Morgan Stanley: Why Tanker Wars Aren’t Causing An Oil Price Spike
Last December, several analysts projected cheaper Canadian oil due to its sulfur content ahead of the introduction of the IMO 2020 rules. The industry itself was worried about its demand prospects as well at the time.
Yet a 2018 Reuters poll among 33 refiners on their IMO 2020 plans found that although as much as 40 percent planned to stop producing high-sulfur fuel oil, the rest had no plans to suspend production despite the expected drop in demand. Instead, they were upgrading their refineries to further process the residual petroleum product into more gasoline and diesel, and also banking on stable demand from the power generation sector: when fuel oil becomes cheap enough, it serves as an alternative to coal.
It’s worth noting all these projections and plans came before the United States slapped severe sanctions on Venezuela specifically targeting its oil industry and before OPEC started cutting its heavy oil production as part of its December 2018 agreement. It was also before Iran’s oil exports were squeezed further by Washington’s removal of sanction waivers to its eight largest oil buyers.
While the IMO 2020 rules will not in themselves favor the Canadian oil industry, they will clearly not do the damage that experts expected last year. The latest indications are that there are new plans for pipeline capacity expansion.
At a time when one would think Kinder Morgan’s Trans Mountain woes had put everyone off pipelines, Plains All American last week announced open season for a 70,000-bpd expansion of its Western Corridor pipeline system. That’s after in June TC Energy launched an open season for a 50,000-bpd expansion of the Keystone system. Demand for Canadian heavy crude seems strong enough to quench any worries about the effects of IMO 2020.
By Irina Slav for Oilprice.com
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