The launch of the expanded Trans Mountain oil pipeline earlier this year was a kind of unique event. In a place where the government did not care much for pipelines and many people also didn't care for pipelines, a big one was allowed to start operating. And there were great hopes attached to it.
Some of these have materialized—Canadian oil sands operators are boosting production. But others have been late in materializing—Canadian oil prices are still trading at a hefty discount to the U.S. benchmark.
Alberta's oil producers had for years struggled to make the best of their resources for lack of export destinations. U.S. refiners had an easy source of heavy crude and because there were no other buyers, prices were permanently pressured into double-digit discounts.
When plans were drawn for the Trans Mountain expansion, producers undoubtedly saw a chance for higher prices. After all, the expanded pipeline would deliver 590,000 more barrels of oil daily to the port of Vancouver, for a total daily throughput of 890,000 barrels. These barrels could be sold abroad where demand for heavy crude was rather healthy due to the scarcity of sources and Canadian producers could get a good price for their product.
Indeed, the first reports about the new and expanded Trans Mountain have been promising. A Chinese company bought its first-ever cargo of Canadian crude back in March, proving that there is indeed demand for Canada's heavy abroad. Another report about a delivery for China surfaced in May.
While these reports are likely to keep coming in as Canadian producers open up to the world beyond the U.S., Canadian oil continues trading at a double-digit discount to West Texas Intermediate. At the time of writing, that discount was around $15, with Western Canadian Select at a little over $58 per barrel and WTI at over $73.
In a report this week, Reuters cited some of the largest oil sands players as explaining the low prices with greater competition from Mexican crude in the Gulf Coast, undermining refineries' demand for Canadian crude. They also noted refinery outages that affected day-to-day demand. Optimism, however, remained.
"Over the next little while I would say we expect Trans Mountain to continue to have its intended impact in Alberta and differentials to be as narrow as they have been in a long time," Cenovus executive vice-president of commercial, Geoff Murray, said, as quoted by Reuters.
"The important thing around Trans Mountain is we've seen the facility come online. It's up, it's operating and it's operating well," he also said, reminding the audience on the conference call where he was speaking about the Netflix serialization-worthy saga that was the story of Trans Mountain.
The massive project was riddled with problems from the beginning, the biggest of which was environmentalist opposition that included not only activists from the general public but also the federal government. By 2018, the company behind the project, Kinder Morgan, got exhausted from the fight and gave up. That same federal government was forced to buy the project because of its sheer scale and the investments already made. It also recognized, albeit grudgingly, that Canadian oil producers could use more pipeline capacity to make more money for tax revenues.
Those producers began ramping up production months before the expanded Trans Mountain entered into operation. For this year, total oil output in Canada is seen growing by between 300,000 bpd and 500,000 bpd, according to a TD Economics note from earlier this year. This rate of growth could look positive, but it could also prompt concern—because further expansions at Trans Mountain are rather unlikely.
Some analysts have warned that Canadian oil producers would only have a couple of years to enjoy their additional export capacity before production surpasses it and prices slump again on the fresh shortage. BMP analyst Ben Pham, for instance, said that the Trans Mountain pipeline would increase Canada's total capacity to 5.2 million barrels daily. Production is already at around 5 million bpd, so this leaves a margin of 220,000 bpd, according to Pham, as spare capacity.
Yet it will quickly evaporate because production growth will continue, RBN Energy analyst Martin King earlier this year. Instead of four or five years of capacity comfort, as originally expected, the Trans Mountain expansion may only provide relief for about a couple of years.
"Originally it was thought TMX would give us a four- or five-year window," the analyst said on February, as quoted by Reuters. "It now looks like that window of spare capacity might actually be a lot smaller."
It is perhaps too early to attribute the stubborn discount of WCS to WTI to these expectations of a pipeline shortage in a couple of years. But it was perhaps also a little too optimistic to expect everyone to rush to buy Canadian crude at once and lift prices to near parity with the U.S. benchmark. The Trans Mountain pipeline has only been operating for a few months, after all. It's quite likely it needs longer to have an impact on Canadian oil prices. Meanwhile, producers might refine their production growth plans. More supply always means lower prices, after all.
By Irina Slav for Oilprice.com
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