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Growing Canadian Production Sends Storage to Record High

Oil Pipeline

Crude inventories at Genscape-monitored storage locations in Western Canada reached the highest level on record in the week ending December 8, 2017, as growing production further surpassed the region’s pipeline takeaway capacity.

The regional congestion and subsequent growth in crude inventories have sent Canadian crude markets plummeting, with the differential for Western Canadian Select down over $15/bbl since the end of October, according to Genscape.

Monitored storage throughout Alberta and Saskatchewan increased 941,000 bbls to 31.824mn bbls for the week ending December 8, the highest level since Genscape coverage began in 2010 and exceeding the previous record high, reached week ending March 10. Stocks in the region have climbed for seven consecutive weeks, surging more than 12mn bbls between weeks ending October 20 and December 8. Based on a drastic upscale in storage capacity in recent years, it can be assumed that the inventory level last week was the highest of all time.

The lion’s share of the inventory build occurred in late November following the shuttering of TransCanada’s 590,000 bpd Hardisty, AB,-to-Steele City, NE, Keystone crude pipeline from November 16 to November 29. The pipeline was shut due to the discovery of a leak in Amherst, SD, and resulted in a 3.368mn-bbl increase in Canadian crude stocks for week ending December 1.

Canadian Crude Oil Storage

Only the beginning of constrained pipeline capacity 

The Keystone pipeline outage is only partly to blame for the recent surge in inventories in Western Canada, as heavy crude production in the region surpassed pipeline takeaway capacity in mid-2017.

After heavy production averaged about 239,000 bpd below heavy pipe capacity in 2016, and was an average 138,000 bpd under pipeline capacity in the first half of 2017, Genscape data showed that the amount of heavy barrels coming out of Western Canada outstripped pipeline export abilities by 21,000 bpd in August. This month, that disparity is expected to widen to 87,000 bpd.

Due to the growth of shipper nominations as production has increased, apportionment for Enbridge’s 2.665mn bpd Alberta-to-U.S. Midwest Mainline system jumped to 21 percent in December, up from 5 percent the previous month, according to a market source. Limitations on nominations in January are expected to be even higher, the source said.

By the end of 2018, Genscape projects that about 338,000 bpd of heavy crude will not fit on regional pipelines, meaning pipelines will remain full and storage will continue to grow.

Pipelines from Western Canada to the U.S. have been particularly strained since the beginning of September due to the growing Canadian crude production, with flows from week ending September 8 through December 8 averaging 3.372mn bpd, or 92 percent of capacity, according to Genscape.

Canada Heavy Crude

All shippers want for Christmas is new pipeline takeaway capacity

Planned pipeline projects will eventually catch up to Western Canadian production, but they are still a ways off.

Enbridge’s Line 3 Replacement Program on the Hardisty, AB,-to-Superior, WI, pipeline is set to nearly double its capacity in January 2019, to 760,000 bpd. The planned expansion of Kinder Morgan’s 300,000 bpd Trans Mountain pipeline – from Edmonton, AB, to Vancouver, BC – to 890,000 bpd is expected by December 2019 at the earliest, and TransCanada’s 830,000 bpd Hardisty, AB,-to-Steele City, NE, Keystone XL pipeline is expected to be online by November 2020.

Heavy crude pipeline takeaway capacity is not expected to surpass production until the Keystone XL pipeline comes online, when it will jump to 3.692mn bpd at that time, about 800,000 bpd over production at that time, according to Genscape.

Full pipes send more crude barrels to rail

With the growing regional production needing an outlet, crude-by-rail loadings at Genscape-monitored terminals in Western Canada have increased.

Volumes loaded at the Alberta facilities have averaged over 100,000 bpd combined over weeks ending November 24 through December 8, marking the first time of three consecutive weeks with loadings higher than that threshold since Genscape began monitoring rail terminals in the province in February 2014.

Through December 8, the December loading average was about 109,000 bpd, 22,000 bpd higher month-on-month and on pace to be the highest monthly loading average since Genscape began monitoring the Canadian facilities. Rail loading volumes have been trending higher in recent months, with the monthly averages for October and September at 78,000 bpd and 66,000 bpd, respectively.

The Kinder Morgan/Imperial rail loading facility in Edmonton, AB, has seen the largest increase this month at 15,000 bpd to 69,000 bpd, its highest monthly average since November 2016, and is up about 31,000 bpd since August. USD’s terminal in Hardisty, AB, is averaging about 28,000 bpd so far in December, about 7,000 bpd higher than the month before and the highest since Genscape resumed monitoring the facility in May 2016

Genscape Canadian Monthly Rail Volume

The increases in crude-by-rail shipments have presented their own set of issues, as they have combined with trains carrying grain in ultimately creating bottlenecks on certain lines, according to market sources.

The constraints on the rail lines and on pipelines recently has caused additional supplies to back up into storage, sending the differential for Western Canadian Select, the regional heavy benchmark crude, tumbling to lows not seen in years.

Genscape assessed WCS on December 11 at $22.50/bbl below the calendar month average of West Texas Intermediate (WTI CMA), the lowest level since Genscape began its assessment in August 2014, and $5.15/bbl below the previous week’s assessment. The previous low was WTI CMA minus $19.50/bbl on August 11, 2014.

The market continued to tank as the week went on, with WCS heard to trade on December 14 as low as WTI CMA minus $28.50/bbl before parsing the losses at the end of the day. With no end in sight for any of the factors leading to the recent weakness, the Canadian crude markets are expected to remain under pressure to the foreseeable future.

Genscape's Canada Crude Oil Storage Report provides weekly snapshot estimates of physical crude oil inventories at Edmonton, Hardisty, Kerrobert, and Alberta Heartland. The report is based on estimated measurements of crude oil storage in each tank and in the cavern connected to the brine lake. To request a free trial of the report, please click here.

Genscape's Canadian Pipeline Service provides unprecedented insight into critical crude oil pipeline flows traversing the Canada-United States border. Market participants can use this data to gain insight into U.S. crude imports by pipeline from Canada, as well as crude flows from the U.S. To learn more, or to request a free trial of Genscape's Pipeline Service, please click here.

Genscape’s Canadian Crude Oil Production Forecast uses a highly detailed bottom-up approach that examines the most significant oil producing areas in Canada providing a detailed production forecast and analysis. The report incorporates provincial well level data along with oil sands in-situ project and upgrader level data to provide the most accurate and detailed driven supply forecast report on the market. Click here to learn more about the Canadian Crude Oil Production Forecast.

Genscape’s PetroRail Report provides fundamental rail loading and unloading volume data, forward-looking and trend market analysis, and spot assessments for U.S. crude benchmarks. The data included in the report can be leveraged to develop new trading strategies, identify economics, and determine the price of the marginal barrel. To learn more, or to request a free trial of Genscape’s PetroRail Report, please click here.

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