Viewpoint: Canadian crude makes inroads at Gulf coast

Canadian crude has the potential to eclipse other foreign supplies at the US Gulf coast in 2020 amid potentially faltering supply from Latin American and Opec producers.

Though Canada has historically been the largest source of imported crude to the continental US, it has made inroads at the Gulf coast, where Canadian crude has traditionally trailed Latin American and Opec supply.

Bottlenecked Canadian crude production continues to push the limits of transportation capacity into the US, increasing rail arbitrage opportunities and demonstrating the need for increased pipeline capacity. As lagging investment, trade sanctions and Opec and non-Opec output cuts hamper competing imports from countries like Mexico, Venezuela, Saudi Arabia and Colombia, these factors also insulate US Gulf coast-delivered Canadian crude prices from other foreign competition.

Prompt Western Canadian Select (WCS) prices delivered to the Houston area in 2019 averaged a discount of roughly $3.25/bl to prompt Mexican Maya delivered at the Gulf coast as of 23 December, which is wider by roughly $1.55/bl than the WCS Houston discount to Gulf coast-delivered Maya in 2018, at $1.68/bl. WCS Houston averages a discount of roughly $3/bl to US Gulf-delivered Colombian Castilla in 2019, wider by about $1.50/bl than in 2018, and the heavy Canadian grade at Houston roughly averaged an $8.10/bl discount to US Gulf-delivered Arab Heavy in 2019, wider by about $3.15/bl than in 2018.

Canadian crude ranked fifth at 193,000 b/d for US Gulf imports in 2014, behind Colombia, Mexico, Saudi Arabia and Venezuela. But from January through September in 2019, Canada ranked second behind only Mexico, according to the US Energy Information Administration (EIA). The US Gulf coast region has imported 506,000 b/d of Canadian crude through September, compared to 569,000 b/d of Mexican crude, according to EIA data. An undersupplied Texas market attracted a record average of 448,000 b/d of Canadian imports in September, surpassing the previous record of 426,000 b/d set in July.

EIA data indicate the US Gulf imported 498,000 b/d of Venezuelan crude in 2018, which is mostly heavy sour. Venezuelan crude shipments have been reduced by US sanctions, opening the door for more Canadian growth.

With Opec and some non-Opec countries recently agreeing to new output cuts into the first quarter of 2020, US Gulf exports of Canadian crude could become a factor, requiring domestic buyers hungry for heavy sour crude to compete with foreign markets. Export demand for Canadian crude could rise if the cuts focus predominately on discounted heavy sour grades, with International Maritime Organisation (IMO) requirements for 0.5pc sulphur in marine fuel emissions set for enforcement starting in January.

Limited supply is already felt at the US Gulf, as January WCS Houston averages a $15.37/bl premium to January WCS at Hardisty in Alberta, Canada, as of 23 December. The spread brings railed crude from Canada to the US into favorable arbitrage territory, as rail transportation is workable at roughly a $15-$20/bl spread. The WCS Houston premium to WCS Hardisty was $14.46/bl during the December 2019 trade month.

Canadian production has been limited by the Alberta government over the past year to promote better prices in Canada, but when mandated curtailment rolls off sometime in 2020, higher production may result in deeper discounts as more permanent transportation capacity awaits construction. Alberta will maintain its crude production limit at 3.81mn b/d for January.

Though long-haul projects from Canada to the US still face legal and permitting roadblocks, there are several that could help satisfy US demand, including TC Energy's 830,000 b/d Keystone XL pipeline and Enbridge's 760,000 b/d Line 3 crude pipeline replacement. Construction has also started on the 590,000 b/d Trans Mountain system. These new infrastructure projects could displace foreign grades in favor of more Canadian crude in coming years.

By Alex Endress