Canadian heavy crude increasingly is flowing more to the US Gulf Coast since new pipeline capacity recently came online, but those barrels also are being priced now to be re-exported worldwide from Texas and Louisiana ports with previously unexpected competition from record US Strategic Petroleum Reserve releases and even from the Russian Urals now flowing to China and India.
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Russia's war in Ukraine and the resulting global sanctions have upended crude flows worldwide and that is no different in North America. The timing just happens to coincide with the ending of Canada's longstanding pipeline bottleneck into the US after the fourth-quarter completion of Enbridge's Line 3 pipeline replacement project, nearly doubling capacity and upping the capacity of Enbridge's Mainline capacity into the US to more than 3.1 million b/d across 8,600 miles.
Early this year, Enbridge completed additional pipeline expansions to help move more crude to the Texas Gulf Coast, and the Capline Pipeline reversal was completed to move Canadian oil sands to the St. James hub in Louisiana.
While the White House's decision to release record volumes from the SPR in Texas and Louisiana is creating a glut of medium and heavy sour grades along the USGC, global demand is such that there is room for every barrel.
However, the increased competition is instead weighing on the pricing of Western Canadian Select barrels along the USGC as well as US Gulf of Mexico medium sour barrels, such as the Mars benchmark.
"I thought there would be more competition and carve out some Canadian crude. But there's such a big gap right now between global supply and demand that it's not really impacting the demand for Canadian crude," said midstream energy analyst Ajay Bakshani of East Daley Capital. "Canada is one of the few places that can ramp up production of sour crude."
The result means the barrels are being priced to move overseas, and crude exports are the strongest they have been since the beginning of the pandemic in March 2020.
US crude oil exports topped 4 million b/d for the week ended June 17, according to data from Platts cFlow ship and commodity tracking software from S&P Global Commodity Insights. An estimated 4.3 million b/d of US crude flowed from domestic terminals, marking a week-on-week increase of more than 1 million b/d. And the the four-week average of US imports from Canada was 3.5 million b/d for the week ended June 10, according to the US Energy Information Administration.
While the US' sweeter shale barrels are desired in much of Europe -- with some exceptions such as Spain buying more Canadian crude -- the medium and heavy sour barrels from the Gulf of Mexico and the Canadian oil sands are preferred in many Asian countries.
China and India are increasingly buying up the heavily discounted medium sour Urals from Russia, creating even more competition. Likewise, European refiners are looking to buy WTI Midland barrels as their lower costs are more attractive than competing North Sea grades such as Oseberg and Ekofisk.
This dynamic has created a healthy run in pricing differentials for Light Louisiana Sweet crude and West Texas Intermediate crude at both the Magellan East Houston terminal and in Midland, Texas, while the medium and heavier sour barrels along the USGC, such as Mars and WCS, have suffered from the unusual supply dynamic.
Mars and other Gulf of Mexico-produced medium sour grades have seen particularly weak differentials through the July trade cycle as ongoing releases from the SPR have pressured values. From May 26 through June 24, when July barrels traded as the front-month contract, Mars has averaged a $6.16/b discount to cash WTI, well below the year-to-date average of a $2.55/b discount to cash WTI for front-month barrels of the grade. Notably, on June 13, Mars as assessed as weak as an $8.25/b discount to cash WTI, the weakest assessment for the grade since October 2008.
Front-month July barrels of the grade were assessed at a $6.80/b discount to cash WTI on June 24, the final day July barrels will be assessed as the front-month contract. August barrels too have seen similar weakness, with second month Mars assessed at a $5.05/b discount to August NYMEX WTI on June 24.
Likewise, front-month differentials for Canadian heavy crude on the US Gulf Coast also have seen weak differentials compared to year-to-date levels. Against the NYMEX WTI CMA, front-month barrels of WCS in Nederland, Texas, averaged an $8.59/b discount over the first 24 days of June, compared to a year-to-date average of $5.54/b discount.
The Biden administration's 180 million-barrel, six-month emergency release from the SPR is an effort to shore up global oil supplies and help Europe curb its dependence on Russian oil imports and ease domestic energy prices. Since most of the crude being released from the SPR is sour, grades including Mars, Poseidon, Thunder Horse as well as heavy sour Western Canadian Select and Coldlake on the US Gulf Coast have seen discounts to WTI widen.
The most recent batch that was sold this week weighed on prices, as the US Department of Energy awarded contracts for 36.31 million barrels of government crude set for release through July 31.
While some crude flows from Russia have continued despite sanctions being imposed by the EU, the discounted Russian oil has been too big a temptation to overlook especially for price sensitive buyers in Asia, such as India and China. That trend continues to pressure the heavy and medium sour crudes exported from the USGC that remain attractive in Asia.
Because of heavier-than-usual seasonal maintenance, Canadian crude production has fallen from nearly 4.7 million b/d at the beginning of 2022 down to just 4.44 million b/d in June, according to Platts Analytics. However, the maintenance season is ending and volumes are ramping back up now. Canadian volumes are forecast to hit a record high of 5.22 million b/d by December.