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Short Term Demand Boosts Oil Market

Short Term Demand Boosts Oil Market

While there's potential for short-term…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Here’s Why Canadian Oil Prices Are Finally Rallying

Bank of Canada

“The pipeline companies are getting pretty creative on how they’re expanding some capacity out of the country,” Keith Chiasson, Executive Vice-President, Downstream at Cenovus Energy, said on the Q2 earnings call at the end of July, describing how midstream operators are trying to get more oil barrels out of Canada until at least one of the major pipeline projects begins service at some point in 2020 or later.  

Pipeline companies—including TC Energy, Enbridge, and the Canadian subsidiary of Plains All American Pipeline—have recently announced plans to increase capacity on some of their pipelines out of Canada to the United States.

Although the amounts are small compared to what a major new pipeline would bring, the increased capacity will still provide some temporary short-term relief to Canadian oil prices. Demand for Canada’s heavy oil from U.S. refiners, especially those on the Gulf Coast, has increased this year after the U.S. slapped sanctions on Venezuela, essentially banning U.S. imports of Venezuela’s heavy crude, while the U.S. sanctions on Iran have additionally choked the Islamic Republic’s heavy grade exports to its customers, tightening the global heavy oil market.  

Canadian producers and Canadian oil prices now appear more positive than they used to be at the start of the year, but the oil patch continues to believe that the long-term solution to Canada’s oil industry’s woes is the construction of major new pipelines to increase market access, and potentially, to tap new export markets outside the buyer of nearly all Canadian oil exports, the United States.

Canadian producers have had a tough couple of years with constrained market access that drove the price of Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands—to a discount of US$50 to WTI Crude in the fall of 2018. This blow-out in the differential between the Canadian benchmark and the U.S. benchmark prompted Alberta’s government to impose at the beginning of 2019 a mandatory production cut across all companies in the province to help ease congested takeaway routes and lift the abnormally low price of Canadian oil. Related: Is Algal Biofuel A Lost Cause?

Just as the production curtailment started, the U.S. sanctions on Venezuela cut off Venezuelan heavy oil supply to the U.S. Gulf Coast and opened an opportunity for more Canadian heavy barrels to go to Gulf Coast refineries. However, full pipelines out of Canada haven’t helped Canadian producers to take full advantage of this opportunity to seize more market share.

Now several pipeline operators have recently announced that they have additional capacity on some of their existing pipelines. Despite the small additional volumes, they will still help Canadian producers in the short term to ship more of their oil to the United States.

TC Energy plans to add 50,000 bpd on the Keystone pipeline in 2020 that “will allow TC Energy to respond to the demand for additional transportation capacity for crude oil from western Canada to the U.S. Gulf Coast,” company spokesman Jamie Harding told Bloomberg in an email.

In early July, Plains Midstream Canada (PMC), a subsidiary of Plains All American Pipeline, announced a proposed expansion of its Rangeland crude oil pipeline system, expected to provide in 2021 incremental southbound takeaway capacity of 80,000 bpd out of the Edmonton market hub.

“We remain focused on leveraging our existing systems in creative ways to meet the growing needs of our customers,” Tyler Rimbey, Executive Vice President, Commercial, PMC, said.  

Enbridge launched last month an open season to support a 50,000-bpd expansion of the Express pipeline.

In late 2019, Enbridge expects to deliver some 85,000 bpd of incremental throughput via its Mainline. The additional flows will be achieved within Enbridge’s current system capacity and operating parameters “through crude delivery and receipt window efficiencies, optimization of crude quality slates, as well as the recovery of Line 4 capacity, which had been previously planned for in early 2020.”

Canadian producers expect some relief to come from these incremental volumes on existing pipelines and from increased crude-by-rail shipments. Related: Oil Could Plunge By $30 If China Restores Iranian Oil Imports

“As we all know, market access has in effect been a cloud hanging over the Canadian oil and gas industry’s head for some time now and rightly so,” Steve Laut, Executive Vice Chairman at Canadian Natural Resources, said on the Q2 earnings call last week, adding that we could be nearing the end of “endless regulatory and legal hurdles.”  

“We’re also starting to see a potential break in the clouds as the Trans Mountain pipeline is set to start construction, access to rail shipments is increasing with capacity ramping up to 500,000 barrel a day range and a potential 50,000-barrel day enhancement on Keystone. Although optimism is in short supply, there are some positives out there,” said Laut.  

Alex Pourbaix, President and Chief Executive Officer at Cenovus, said on the Q2 call at the end of July that his company boosted its Q2 crude-by-rail shipments to the U.S. Gulf Coast to average 36,000 bpd from about 16,000 bpd in Q1, and remains on track to ramp up its rail capacity to around 100,000 bpd by the end of the year.  

Pourbaix, however, added:

“It’s important to note here that while expanding rail capacity is critical to resolving Alberta’s near-term market access issues, we still need new pipelines.”   

By Tsvetana Paraskova for Oilprice.com

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