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100--ANALYSIS: Canadian heavy crude stays weak as market waits for rail

Western Canadian heavy crude differentials have another hurdle toovercome before an expected rebound later this year: higher crude-by-railexports seen late last year are not expected to have carried over into Januaryand February because of bad weather and competition from other commodities.

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"I think what you'll see is that volumes were flat-to-down slightly inJanuary as volumes into and out of the holiday season looked to have slowed,"said Matt Murphy, an analyst at energy-focused investment bank Tudor,Pickering, Holt & Co.

The latest data from Canada's National Energy Board show crude-by-railvolumes out of Western Canada rose 19.5% year on year to 152,151 b/d inDecember. Though the December figures are higher compared with the year-agoperiod, they are still less than the 155,655 b/d exported in March 2017 and175,654 b/d exported in December 2014.

When differentials for Western Canadian Select at Hardisty widened to asmuch as the front-month NYMEX light sweet crude futures contract calendarmonth average (WTI CMA) minus $41.75/b in November 2013, Canadiancrude-by-rail volumes exports rose to 166,570 b/d in December of that year, a33% jump compared with December 2012. Discounts often widen to account for themore expensive rail transport.

WCS at Hardisty was heard to trade at WTI CMA minus $26.50/b Thursday,firming slightly after falling for three days. The differential for WCS atHardisty has widened from a discount of $14/b in November, before thetemporary shutdown of TransCanada's 600,000 b/d Keystone pipeline on November16 and its restart at reduced pressure on November 28. TransCanada hasdeclined to say how much crude is currently flowing on the pipeline, andestimates have varied widely.

"I'd say it's certainly a step in the right direction, but more isneeded to clear the market," Murphy said of the higher rail volumes out ofCanada in December.

The NEB is scheduled to release crude-by-rail statistic for January theweek of March 26.

Canadian rail carriers struggled early this year with extreme cold andsnowfall.

Oil services company Halliburton said Canadian National Railway's delaysin delivering frac sand would hurt its profit in the first quarter.

CN replaced its Chief Executive Officer on March 5, and new interim CEOJean-Jacques Ruest apologized in a statement Wednesday for not meeting theexpectations of its grain customers.

"CN has experienced rapid growth across the company, with the business up10% in 2017," Canadian National spokesman Patrick Waldron said in an email toS&P Global Platts.

"Much of that traffic growth is focused in Western Canada and that rapidgrowth combined with challenging winter conditions this year has presentedsome operational challenges and congestion on key corridors," he added.

Waldron said the company has taken steps to meet its customers' needsincluding, "adding 100 additional short-term leased locomotives and hiring 400new conductors in the first three months of the year."

CN competitor Canadian Pacific has expressed less enthusiasm for shippingcrude in general.

CP President and CEO Keith Creel said during an earnings call in Januarythat the company is not interested in partnering with companies that ship onlycrude and prefers contracts with more diversified firms.

Producers are counting on increased rail shipments to clear the glut ofcrude that has accumulated in Alberta. More Canadian crude will likely movedby rail to the US by the middle of the year, which should take pressure offWCS crude prices, Alex Pourbaix, president and CEO of Cenovus Energy, saidearlier this week.

The current imbalance in takeaway capacity is "relatively small," he saidon the sidelines of the CERAWeek by IHS Markit conference.

"We are not talking millions of barrels," Pourbaix said. "[But] a very,very small imbalance in takeaway capacity can drive really widedifferentials."

There is "probably 300,000 b/d plus of rail loading capacity that ispresently idle [in Alberta]," Pourbaix said. "So just getting a fractionof that rail loading capacity moving should significantly mitigate thewide differentials we are seeing."

Tudor, Pickering, Holt analyst Murphy said he expects crude-by-railvolumes out of Canada to be down marginally in January with February volumesup marginally from December.

"I think what's important is that it looks like it's remained in prettymuch the same ballpark on our estimates (150-170,000 b/d) when industry needsit to be picking up in a big way," Murphy said in an email. "This is reallywhy we think differentials have remained as wide as they have."

Tudor, Pickering, Holt last week revised its price forecast for WCS atHardisty, saying it is likely to trade at a discount of $19-$20/b to the WTICMA at the end of 2018 rather than dip down to a range around minus $18/b inthe second half as previously forecast.

"While we don't believe a $25/b (discount) reflects a normal market, wethink calls for $15/b differentials don't reflect how the market has shifted,"Murphy said in the report.

--Pat Harrington, patrick.harrington@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com