Canadian oil collapses amid pipeline and rail bottleneck

By Robert Tuttle on 12/13/2017

CALGARY (Bloomberg) -- Heavy Canadian crude fell to the lowest in almost four years against benchmark prices Tuesday as bottlenecks on pipelines and rail networks crimped exports.

Canadian crude’s discount to West Texas Intermediate futures has widened more than $15 since August as pipeline companies including Enbridge Inc. rationed space amid high Western Canadian inventories. Rail cars struggled to catch up on deliveries after line disruptions over the past two months.

“You are in a serious pain point right now,” Mike Walls, a Genscape Inc. analyst, said by phone from Boulder, Colorado. “It’s the perfect storm of too much supply and not enough capacity.”

Western Canadian Select’s discount to WTI steepened $4.75 to $26.50/bbl, the weakest level since December 2013, according to data compiled by Bloomberg at 1:13 p.m. Calgary time on Tuesday. It was $10.05 below WTI four months ago. The outright price of the crude slid $5.60 to $30.64/bbl, the lowest level in a year. Edmonton Mixed Sweet crude’s discount to WTI grew $1.50 to $7.50/bbl, the widest since January 2015, and the price fell $2.35 to $49.64/bbl.

TransCanada Corp.’s Keystone pipeline to the U.S. shut for almost two weeks last month after a spill in South Dakota, contributing to rising oil inventories in Western Canada. While service on the line has resumed, it’s required to run at a reduced pressure, meaning less oil can pass through.

Enbridge said Monday it would ration space on some of its pipelines by another 5% in December. The announcement came after the company required shippers on light oil feeder pipelines around Edmonton, Alberta, to restrict deliveries because of “high inventories.” Enbridge’s main line ships heavy and light crude from Edmonton to Superior, Wisconsin.

Rising production

Crude export pipelines were already filling up as new oil sands production entered the market. Suncor Energy Inc.’s Fort Hills mine, for example, is starting up now and scheduled to reach 20,000 to 40,000 bpd by next quarter. 

When pipelines fill up, excess crude is typically pushed onto rail cars, requiring a bigger price discount for the crude to make the more expensive form of transport profitable. 

Space on rail cars is in short supply after three disruptions to the Canadian National Railways Co.’s system in the past two months. The company is playing “catch up,” Kate Fenske, a spokeswoman, said by phone Monday. Business on all of the company’s lines is up 10% since last year, she said. 

Canadian National gives shippers who have committed to use capacity on the network priority when space is limited because the rail company would have to pay a penalty for shipments not delivered, Fenske said. But Canadian oil shippers have been reluctant to sign up for committed space on rail networks after three new oil export pipelines were approved over the past year, Genscape’s Walls said. That’s in contrast with shippers of other commodities, who have been signing up for space, he said.

Two of the new oil pipelines, the expanded Trans Mountain line to British Columbia and Enbridge’s Line 3, could start operation as early as 2019. 

“You may not see a lot of people committing on rail right now and that’s causing the differentials to blow out,” Walls said.

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