(World Oil) – Canadian oil producers riding a boom from the expanded Trans Mountain pipeline are now grappling with increasing price discounts for near-term supplies, a sign that a supply glut is taking hold.
Canada’s flagship oil grade’s discount has grown to more than $15 a barrel in recent days from less than $13 a barrel two months ago. The last time it traded at this level was when the Trump administration briefly threatened tariffs on Canadian oil in January of last year.
More revealing, the discount for crude available one month in the future is growing increasingly bigger than the discount for oil sold two or three months in the future, a market structure that signals a glut of supply is forming. Crude sold one month in the future traded at a premium to later months as recently as November.
Global oil markets are facing significant oversupply this year as output from OPEC countries and beyond surged over the past few years. Still, investors remain on edge, keeping prices prone to geopolitics-driven spikes.
The start of the expanded Trans Mountain pipeline less than two years ago gave Alberta’s oil sands producers a rare surplus of export pipeline capacity along with access to the lucrative Chinese market.
The abundance of export options propped up the price of Canadian heavy oil, which has traded at discounts to a monthly average of the U.S. benchmark West Texas Intermediate of about $12 a barrel since TMX opened versus about $17 a barrel in the year before the start of the pipeline.
That allowed producers in Alberta to hike production to record levels last year.
But as space on pipelines fills up and market structure allows producers to sell oil in later months for higher prices, more crude is also likely to end up in storage for future sale. Enbridge Inc. rationed more space on its Mainline oil export pipeline system in February than any time in the last two years.
Canadian crude has also faced added competition that has undercut the economics of sending oil to refineries on the U.S. Gulf Coast. Increasing volumes of Venezuelan oil — a high sulfur, dense crude that’s a natural competitor to the crude pumped from the oil sands — has been making its way into the Gulf of Mexico since the U.S. removed the country’s President Nicolás Maduro in early January.
Heavy Canadian crude on the Gulf for delivery two months in the future trades at a $7.70
premium to crude in Alberta for delivery in one month, according to Modern Commodities and Link Data Services prices. A shipper needs a price difference of at least $8 or $9 to ship it profitably, according to a trader with knowledge of the market.
And while shipments to China off TMX fell to the lowest in almost a year in January from a record high in November, Chinese refiners have been eyeing Canadian oil as a replacement for discounted Venezuelan barrels they received before U.S. military action in the Latin American country. Recently, Shandong Chambroad Petrochemicals Co. offered to buy Canadian Cold Lake oil off TMX.
“The return of Venezuelan crude has created potential new competition for Canadian oil on the U.S. Gulf Coast and in other export markets, including China,” said Jeff Barbuto, global head of oil markets at ICE. “In China, it’s more than Venezuelan crude competing with Canadian; growing flows of inexpensive Russian crude are also competing with Canadian barrels.”
