Heavy sour Canadian crude has largely recovered from last year's large discounts to a key benchmark, with growing demand rebounding from a range of 2022 issues, from unplanned US refinery outages to competition from releases of US strategic reserves.

WCS Houston was assessed during the week ending 19 May at a discount narrower than $5/bl to the CMA Nymex, which serves as the basis for Canadian crude trades in both the US and Canada. That’s the slimmest since late April of last year and far off the $20-$30/bl discounts seen in October. Even more tightening may be on the horizon if the Trans Mountain Expansion (TMX) pipeline, which will give Canada’s oil sands greater access to west coast ports, meets its early 2024 completion goal. 

WCS’ 2022 challenges came from many fronts. Several unplanned outages at US refineries that take Canadian heavy crude in the fall widened the discount. This included Cenovus’ Toledo, Ohio, refinery which can process about 90,000 b/d of heavy sour crude, and Phillips 66’s Wood River refinery, which is the largest importer of Canadian crude. An unprecedented release of 180mn bl from the US Strategic Petroleum Reserve in 2022, much of it sour, also pressured demand for WCS. 

The redirection of Russian Urals crude to India reduced import volumes of Canadian heavy crude from one of the most reliable sources of foreign demand outside the US. Chinese oil demand was also lower as Covid-19 restrictions depressed economic activity. 

All three of Argus’ WCS assessments— in Houston, Texas; Cushing, Oklahoma; and Hardisty, Alberta — fell to record discounts in October, with Houston at about $22/bl, Cushing at over $25/bl, and Hardisty at a $32/bl discount.

Demand has since picked up in 2023, with the restart of the Toledo refinery and Wood River. Expansion projects at Houston area refineries by Valero and Marathon Petroleum designed to capture wider heavy sour crude discounts in order to boost margins also added further demand. 

Seasonal upstream maintenance in the Canadian oil sands, which is typical in the spring, has reduced production of the bitumen used to blend into a heavy sour “dilbit” crude, reducing supply and adding support for prices.  

Long wait for TMX nears an end
Discounts will likely continue to face narrowing pressures with the pending TMX pipeline opening oil sands producers' access to new markets in Asia-Pacific and the US west coast. 

TMX is expected to be operational in the first quarter of 2024,barring any delays from rising costs, adding 590,000 b/d of additional takeaway capacity between Edmonton, Alberta, and Burnaby, British Columbia. The new line will combine with the existing 300,000 b/d Trans Mountain pipeline for a total capacity of 890,000 b/d. At the TMX’s termination point in Burnaby, the Westridge marine terminal will be prepared to load 34 Aframax tankers and three barges per month.

It is hard to say how much traffic TMX will attract, but midstream firm Enbridge said earlier this year it expects to lose as much as 5-10pc of its current volumes from the 3mn b/d Mainline feeding US markets on TMX's startup.

Initially, most of these volumes are expected to go to the US west coast. But new markets are expected to develop, giving producers in the oil sands region access to buyers in Asia-Pacific, as the voyage to Asia from the Canadian west coast is about 17 days, compared to 36 days for vessels from the US Gulf coast.

The additional demand from new markets is expected to support Canadian heavy crude prices next year.

Author Scott Phillips and Sam Duffy