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  • End Session Commentary - Detailed News

Market Speaks: US Gulf Coast Witnessing Significant Increase In Canadian Crude Oil Imports
28-Feb-19   17:47 Hrs IST

The volume of crude oil imports to the US Gulf Coast (Petroleum Administration for Defense District, or PADD, 3) from Canada has increased significantly during the past several years, reaching a record high of 644,000 barrels per day (b/d) in October 2018. Canada’s exports tend to be heavy crude oils, which Gulf Coast refiners are well equipped to process. Increasing volumes of Canadian crude oil have been transported to PADD 3 via rail (a more expensive option than via pipeline) because the existing pipelines have largely reached their capacities. This capacity limitation has created a transportation constraint and contributed to large price differentials between Western Canadian Select (WCS) and West Texas Intermediate (WTI) crude oils. The future levels of crude-by-rail shipments from Canada to the United States and price differentials between WCS and WTI are uncertain, as trade press reports indicate that increased shipping capacity in both rail and pipelines are expected by the end of 2019.

In October 2018, when Midwest refinery utilization reached its lowest level since 1985, month-over-month Gulf Coast imports of Canadian crude oil increased by over 140,000 b/d. Because the Midwest processes most U.S. crude oil imports from Canada, this temporary decrease in Midwest refinery demand for crude oil likely contributed to the increase in Gulf Coast imports. Lower demand in the Midwest for crude oil may have also contributed to the increasing price differentials between WCS and WTI. The larger price spread likely offset any additional costs of transporting crude oil from Canada to the U.S. Gulf Coast instead of to the Midwest.

Most Gulf Coast refineries are complex and are optimized to process heavy, sour grades of crude oil. Because most new US crude oil production is light and sweet, many Gulf Coast refineries import heavier crude oils such as WCS (Canada’s primary export-grade crude oil) which is considered heavy and sour, with an API gravity of 20.3 degrees and average sulfur content of 3.4%. Another primary source of heavy, sour crude oil for U.S. Gulf Coast refiners is Venezuela, and US imports of Venezuelan crude oil have decreased in recent years amid political turmoil and declining production. Recently announced US sanctions directed at Venezuela’s energy sector and its state oil company, Petróleos de Venezuela, S.A. (PDVSA), will essentially eliminate US imports of Venezuelan crude oil as the full effects of the sanctions emerge.

Because WCS is similar in quality to Venezuelan heavy, sour crude oil, Gulf Coast refineries have imported more Canadian crude oil to compensate for falling Venezuelan crude oil imports. Gulf Coast imports of Venezuelan crude oil fell from an average of 618,000 b/d in the first 11 months of 2017 to 498,000 b/d during the same period in 2018. During the same period, imports from Canada to the U.S. Gulf Coast increased from 394,000 b/d in 2017 to 490,000 b/d in 2018.

Growth in Canadian crude oil production has exceeded the current pipeline capacity available to export it, which has contributed to the significantly lower price for WCS in 2018, making transporting crude oil via rail more economical. Crude-by-rail volumes from Canada to the Gulf Coast from January through November 2018 increased by 66% compared with the same time period in 2017. With Gulf Coast refiners’ demand for heavy crude oil unlikely to decline, imports into the region from Canada are likely to remain strong. However, with expanding pipeline and crude-by-rail capacity expected by the end of 2019, the long-term viability of crude-by-rail remains uncertain unless Canadian crude oil remains strongly discounted to WTI.

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