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Impact of Keystone pipeline outage spills over to crude and refined markets

Houston — This week's shutdown of the TC Energy's 590,000 b/d Keystone pipeline following a crude oil spill sent Canadian and Midcontinent crude values downward before rippling into refined product markets, pushing those values upward.

The spill occurred Tuesday night in Northeast North Dakota. On Thursday morning, state officials reported that 9,120 barrels of crude oil had leaked from the pipe.

Pipeline operator TC Energy has not given a timeline on when Keystone will return to service and said in a statement Thursday that the company remains focused on cleanup. The pipeline will remain shut from Hardisty, Alberta, to Cushing, Oklahoma, and to Wood River/Patoka, Illinois, while TC Energy cleans up the spill and repairs are made.

The pipeline shutdown sent the differential for front-month Western Canadian Select, Canada's benchmark heavy crude, to its weakest differential since December 2018. During Friday morning trading, WCS in Hardisty was heard to trade at a $21/b discount to the NYMEX WTI CMA, down over $4/b from where the grade was heard to trade at Wednesday morning before the news had circulated. The grade was last assessed at a weaker value on December 5, 2018, when it was assessed at a $23.50/b discount.

The pipeline outage not only affected heavy sour crudes, but also Canada's Mixed Sweet crude, which was heard to trade at an $8.75/b discount to the WTI CMA. The grade was last assessed weaker December 6, 2018, when Mixed Sweet was assessed at a $10/b discount to the WTI CMA.

While the pipeline outage weakened differentials for crudes in Alberta -- a province already plagued by constraints to their crude takeaway capacity, which necessitated government-mandated curtailments on their crude oil production to offset steep discounting -- heavy Canadian crude strengthened in the US Gulf Coast and in Cushing, Oklahoma, amid concerns of tightening supplies. December barrels of Cold Lake Blend on the USGC were heard to trade Thursday at a $3.75/b discount to the WTI CMA, up from a $5.95/b discount that December barrels of the grade were heard to trade at October 24.

REFINED PRODUCTS UP

Refined products markets in the US Midwest exhibited a bullish attitude toward the spill, with Chicago differentials for CBOB and RBOB gaining from Thursday's settlements. Chicago pipeline CBOB was heard to have traded early Friday morning as high as NYMEX December RBOB futures minus 9 cents/gal, up 8 cents from Thursday.

Reductions in regional gasoline stocks will no doubt exacerbate the situation. Data published Wednesday by the US Energy Information Administration (EIA) showed a weekly drop in stocks of approximately 575,000 barrels, with total stock levels moving to 47.99 million barrels for the week ended October 25.

Market sources said that these differential gains may be only temporary, with one source saying that one of the most important factors would be the duration of the pipeline closure.

Crude market sources said Thursday that they expect that the line will be down between five and 10 days.

The US Midwest refined products market is supplied by the Explorer pipeline, which originates in the US Gulf Coast. EIA data showed that while the Midwest total gasoline stocks have fallen, stocks in the Gulf Coast have surged, adding 439,000 barrels during the week ended October 25. "It takes somewhere between 12 and 15 days to get products up the pipe from the Gulf to Chicago", one source said, "I think if the closure lasts at least as long as that it could have a sustained impact on pricing."

Colder weather in the Midwest may also play a role in cushioning the impact of the pipeline closure, with temperatures in Chicago on Friday morning dropping into the lower thirties. According to the National Weather Service, regional snowstorms were expected to hit the Greater Chicago area Saturday morning, which will no doubt encourage potential weekend motorists to stay indoors and off the roads.

--Kenneth Raphael,?Kenneth.raphael@spglobal.com

--Kristian Paris Tialios,?Kristian.tialios@spglobal.com

--Laura Huchzermeyer,?Laura.huchzermeyer@spglobal.com

--Edited by Pankti Mehta, pankti.mehta1@spglobal.com