Energy Prospectus

Expanded Trans Mountain pipeline capacity fails to lift Canadian heavy oil price

http://www.investing.com/news/commodities-news/expanded-trans-mountain-pipeline-capacity-fails-to-lift-canadian-heavy-oil-price-3556227

Reuters) - The Trans Mountain oil pipeline expansion (TMX) was meant to shrink the discount on Canadian oil versus U.S. crude but three months in the differential is wider than when commercial operations on the project started.

(the caveats to the headline...)

On earnings calls last week, Cenovus Energy (NYSE:CVE) and Canadian Natural (NYSE:CNQ) Resources Ltd, both major shippers on TMX, blamed a number of factors.

These include increased competition on the U.S. Gulf Coast from Mexican heavy crude imports and U.S. refinery outages including ExxonMobil (NYSE:XOM)'s 251,800-bpd Joliet, Illinois, plant that took most of its units offline after losing power following a tornado last month and has not yet fully restarted.

"Over the next little while I would say we expect Trans Mountain to continue to have its intended impact in Alberta and differentials to be as narrow as they have been in a long time," said Geoff Murray, executive vice-president of commercial at Cenovus.

RBC Capital Markets analyst Greg Pardy said pipeline egress out of western Canada appeared to be running smoothly.

"The main fly in the ointment may be elevated inventory levels in select U.S. regions, but time will tell," he wrote in a note to clients.

Weak demand from major sour crude consumer China was also weighing on heavy oil grades globally, said Rory Johnston, founder of the Commodity Context newsletter, adding that expectations that expanding Trans Mountain would significantly narrow WCS differentials had been overdone.

"The main value of TMX wasn't really a low WCS differential but rather a vastly lower probability of another differential blowout, which fingers crossed we still aren't going to see here even if we're back above $15," Johnston said.

I do not agree that, as suggested above, the impact of the start of the Trans Mountain on realized oil prices of Canadian oil and gas companies is non-existing.

Looking at the Q2 results to date, I see for 80% of the Canadian oil and gas companies realized oil prices, which have a (slightly) smaller delta to WTI than what would have been expected based on deltas in 2023 and Q1 2024. It is not overwhelming, but the trend is there.

Of course, there are many other factors to be considered which influence oil prices. Q3 should provide more clarity.

Don Simmons, CEO of Hemisphere told me that they received much better oil prices in April than they did in March and that it was due to the big drop in differentials for his heavy oil.

This site, https://oilprice.com/oil-price-charts/257, is reporting WTI at $75.50 and US:WCS Select at $58.80, for a difference of $16.70. Not sure if that is an accurate depiction of current "WCS discount." I have read recently that the WTI-WCS discount was in the $15 range.

This site, https://en.macromicro.me/collections/400/mm-cad/4341/wti-wcs-spread, contains an interactive chart showing the WTI-WCS spread, but it is behind a paywall, and I am not a subscriber to macromicro. If anyone here is a subscriber, it would be helpful to see the trend of the spread over the last year.

I believe the posted article is suggesting that while the differential narrowed in Q2 (when the TMX pipeline extension began operation), it has since widened a bit, possibly for the reasons mentioned in the article (some of which reasons sound possibly temporary). If so, the question then is how much that is impacting companies like HMENF. I.e., what would Don Simmons say they are getting for their product vs what they averaged in Q2. Also, in HMENF's case, I believe there is a second discount that is taken due to the quality of their oil, but that may be independent (not impacted) by any change in WCS differential.

From Don Simmons:

The discount on Western Canada Select (WCS) heavy crude versus the North American benchmark West Texas Intermediate (WTI) narrowed on Wednesday:
* WCS for September delivery in Hardisty, Alberta, settled at $13.35 a barrel below WTI, according to brokerage CalRock, having settled at $13.60 a barrel under the U.S. benchmark on Tuesday.

* Exxon Mobil restarted select units at its 251,800 barrel-per-day refinery in Joliet, Illinois, three weeks after it lost power following a storm. Joliet is a major consumer of Canadian heavy crude.

* Global oil prices gained more than 2%, bouncing back from multi-month lows, after data showed a bigger-than-expected draw in U.S. crude stockpiles, even as worries about weak oil demand in China persisted.

According to this source, the spread has narrowed a bit further since Don Simmons' report (Wednesday close - $13.35) to Dan this past week. Hardisty is the site Don Simmons cited, so apparently it's the one HMENF uses, but regardless, the point is the narrowing general trend. (Don't be misled by the title's use of the word "wider" -- it's referring only to the change from Thursday ($13.10) to Friday ($13.20).) https://boereport.com/2024/08/09/heavy-oil-discount-edges-wider-2/

Heavy oil discount edges wider

August 9, 20243:07 PM Reuters

The discount on Western Canada Select (WCS) heavy crude versus the North American benchmark West Texas Intermediate (WTI) widened slightly on Friday:

* WCS for September delivery in Hardisty, Alberta, settled at $13.20 a barrel below WTI, according to brokerage CalRock, having settled at $13.10 a barrel under the U.S. benchmark on Thursday.

* Canadian heavy crude differentials have gained support this month from some U.S. Midwest refineries restarted operations after unplanned shut-downs in July.

* Global oil prices settled higher and notched over 3.5% in weekly gains as positive economic data and signals from Fed policymakers that they could cut interest rates as early as September eased demand concerns, while fears of a widening Middle East conflict continue to raise supply risks.