Canadian WCS forecasts strengthen, pressuring rail exports

Houston — Western Canada's benchmark heavy crude differential is now forecast to trade above WTI CMA minus $20/b for the rest of the year, a call bolstered by a strengthening futures curve and one that suggests spot rail transactions may become uneconomical for many shippers.

S&P Global Platts Analytics expects the WCS/WTI differential to average around minus $19/b for 2020, up from previous forecasts that showed WCS at below WTI CMA minus $20/b for the balance of the year.

The futures market shows the average April differential for Western Canadian Select at Hardisty at WTI CMA minus $17.60/b, according to data on the CME Group website. The data show the May average at WTI CMA minus $16.90/b, June at minus $16.35/b and July at minus $15.70/b, with the average for the rest of the year at WTI CMA minus $17.03/b.

"I would have to think rail does fall off," one trader said of how strong the futures curve for WCS has become. "Producers may continue to rail, but trade shops won't since it will be out of the money."

Traders and analysts say the stronger outlook for WCS and other heavy Canadian grades is the result of declining storage levels in Alberta as more crude flows in existing pipelines and on rail cars. OPEC cuts, sanctions on Venezuela and Iran, and high levels of scrubber adoption ahead of the IMO 2020 spec change have all kept demand high for heavy crude, sources said.

Still, traders caution that some of the crude that has pushed rail exports higher was probably purchased in December and January, when WCS traded below the WTI CMA minus $20/b level. While WCS averaged WTI CMA minus $22.80/b in January, the grade traded as high as WTI CMA minus $15.70/b February 11. The blend was last assessed at WTI CMA minus $17.45/b.

Rail under pressure

With WCS trending stronger, traders have said some rail estimates may be overly optimistic. Alberta Premier Jason Kenney told S&P Global Platts in an interview earlier this month rail volumes will average around 500,000 b/d this year, up more than 100,000 b/d from the record 353,789 b/d exported in December 2018. Canada exported 297,000 b/d in November, the latest official statistics from the Canadian Energy Regulator, with most analyst estimating current exports at around 400,000 b/d.

Platts Analytics sees crude-by-rail exports out of Canada hitting new highs of more than 400,000 b/d in the first quarter, especially as weaker differentials in January made rail shipments more profitable. Platts Analytics sees Canadian rail movements in the second quarter coming under pressure as producers perform seasonal maintenance, before they rise to more than 400,000 b/d again in the fourth quarter.

Matt Murphy, an analyst with Tudor, Pickering, Holt in Calgary, said the futures curve suggests an average spread for WCS between Hardisty, Alberta, and Houston of around $12.50 for the rest of the year. That level is "on the lower end" what producers find attractive for shipping barrels by rail, he said. Still, he said, many shippers have little alternative than to ship by rail.

"Our view would be that rail remains running with some question marks on the June to August months," he said.

Market participants have said it costs around $12/b to ship from Hardisty to USGC on a long term, committed rail contract, with spot rail costing around $15/b to $18/b.