Crude-by-Rail Loadings in Canada Bounce Back in April on Improved Economics

Crude-by-Rail Loadings in Canada Bounce Back in April on Improved Economics
Blog May 13, 2019

Canadian crude-by-rail loadings in April rebounded 47,000 bpd from the March monthly average. Wider Canadian crude differentials and increased demand from Gulf Coast refiners, in the wake of sanctions on Venezuela’s oil sector, made rail transportation more attractive to some shippers.

Narrower Western Canadian Select (WCS) Differential Put Brakes on Rail in February

Rail loadings in Western Canada finished April at an average of 197,000 bpd, up from 150,000 bpd in March and 144,000 bpd in February, the lowest monthly average since May 2018. Loadings started to decline in mid-January after mandated crude production cuts from then-Alberta Premier Rachel Notley aimed to boost Canadian crude differentials and drained regional inventories went into effect.

The differential for WCS averaged $40/bbl below the calendar month average of West Texas Intermediate (WTI) between September 10, 2018, and November 26, 2018, according to our PetroRail report. The WCS differential then tightened to WTI CMA minus $10.50/bbl in mid-December following the Notley’s December 2, 2018 announcement of the temporary 8.7 percent, or 325,000 bpd, production cut of raw crude and bitumen. After the cuts started January 1, 2019, the WCS differential narrowed to WTI CMA minus $7.35/bbl on January 14, 2019.

The narrower differentials eroded much of the margin necessary to make crude-by-rail from Canada economic, causing a dramatic decline in rail volumes.

After posting the second straight week of record high loadings in week ending January 11 at 356,000 bpd, rail volumes began to decline, with the weekly average falling to 156,000 bpd by week ending February 1.

The Kinder Morgan/Imperial terminal in Edmonton, AB, represented the overall decrease. After registering the second-highest weekly average on record at 116,000 bpd in week ending January 4, volumes began to steadily drop, our data showed. Imperial Oil said on February 1 that February crude-by-rail shipments from the facility would be "near zero," and that differentials need to be $15/bbl to $20/bbl below WTI to make the moves economic.

USD’s Hardisty, AB, facility also saw its loading volumes tumble due to unfavorable market conditions. After averaging a record high in January at 134,000 bpd, its loadings averaged 77,000 bpd in February and 83,000 bpd in March, according to our data.

Figure 1: Narrower WCS differential resulted in fewer Canadian rail loadings (Source: Genscape)
Figure 1: Narrower WCS differential resulted in fewer Canadian rail loadings (Source: Genscape)

Sanctions on Venezuela Helped Open the Window for Canadian CBR

By mid-March, the WCS differential widened to as much as WTI CMA minus $15/bbl, according to market sources. After there were no rail loadings at the Edmonton terminal between January 27 and March 15, our PetroRail loadings data showed volumes averaged 39,000 bpd in week ending March 22. The company said it resumed shipping from its facility due to a marginal improvement in rail economics. The terminal then posted a 26,000 bpd monthly average in April.

In addition to the wider WCS differential, rail economics to the U.S. Gulf Coast were helped by lower Venezuelan crude imports following U.S. sanctions on the PdVSA and the country's oil sector on January 28. Imports from Venezuela to the U.S. averaged 517,000 bpd in January, before the sanctions kicked in. By February, they declined to 240,000 bpd and were 96,000 bpd in March, according to our North American Waterborne report.

Other heavy Latin crudes partially filled in the shortfall of the Venezuelan barrels with Mexican imports increasing 125,000 bpd month-on-month in February. Colombian barrels averaged 180,000 bpd more in April compared to March.

Figure 2: Tighter heavy crude market opened window for other heavy crudes to PADD 3 (Source: Genscape)
Figure 2: Tighter heavy crude market opened window for other heavy crudes to PADD 3 (Source: Genscape)

Production Cuts Proved Ineffective in Reducing Crude Stocks

Notley’s aim to drain the province’s inventories seemed to take an effect initially as storage levels fell in January, but crude stocks flattened out and then climbed on the lower rail volumes.

Western Canadian crude inventories rose for the second straight month in April, increasing 2.5mn bbls between weeks ending April 5 and April 26, according to our Canada Crude Oil Storage report. A four-hour outage on TC Energy’s 590,000 bpd Hardisty, AB, -to-Steele City, NE, Keystone pipeline on April 22 contributed to stock levels hitting a record high in week ending April 26. Record-high stocks in late April were a clear signal that the province's efforts to control supply had so far been unsuccessful in alleviating the glut.

Conclusion

Alberta held a general election on April 16 to select members of the Legislative Assembly of the province. The United Conservative Party (UCP) won a majority of the Assembly, making Jason Kenney, leader of the UCP, Premier of Alberta. The election holds strong implications for the province's future involvement in troubled oil markets. Under Notley of the New Democratic Party, Alberta announced plans to lease 4,400 crude-carrying rail cars to help alleviate crude takeaway capacity constraints in the region. The additional rail cars could move up to 120,000 bpd by 2020, with the first shipments starting as early as July 2019.

Kenney vowed to cancel contracts associated with Alberta's current plan to ship more crude-by-rail. Kenney claims he would instead focus on more aggressive methods of progressing planned pipeline projects. Although there is some uncertainty on his ability to backtrack on previously finalized contracts, the differing stances demonstrate the relevance of the election in Canadian oil markets. The shift in the majority party could change the provincial government's future approach to addressing the Western Canadian bottleneck and could potentially lead to a reversal on previous initiatives.

Genscape provides daily information on crude-by-rail shipments for about 80 percent of loading volumes in Canada in the PetroRail Report. Additionally, we report on near-real-time pipeline flows for 88 percent of Canada-to-U.S. pipeline capacity and monitor crude inventories at key hubs in Western Canada, including the storage hubs in Edmonton and Hardisty. Find out more in our Canadian Pipeline Service and the Canada Crude Oil Storage Report.