U.S. imports of Canadian crude oil by rail increase
Growth in Canadian crude oil production has outpaced expansions in pipeline takeaway capacity, driving Canadian crude oil prices lower and increasing Canadian crude oil exports by rail to the United States. However, the outlook for increased volumes of Canadian crude oil by rail to the United States is highly uncertain despite increased U.S. demand for Canadian crude oil, specifically on the U.S. Gulf Coast.
Crude oil production in Canada increased to 3.9 million barrels per day (b/d) in 2017, up approximately 300,000 b/d from 2016. However, crude oil pipeline capacity out of Canada has failed to keep pace with growing production. Several pipeline projects, some to the United States and others across Canada to its Atlantic and Pacific Coasts for export, have either been canceled or significantly delayed. Additionally, the 590,000 b/d Keystone pipeline is currently limited to 80% of capacity since a leak in November.
Because of these conditions, volumes of Canadian crude oil exported to the United States by rail increased between 2016 and 2017. In December 2017, U.S. imports of Canadian crude oil by rail set a monthly record of 203,000 b/d, nearly matching domestic intra-U.S. crude oil by rail movements of 240,000 b/d for the same month (Figure 1). While U.S. crude oil by rail imports from Canada fell to 129,000 b/d in January 2018, volumes remain slightly higher year-over-year.
The costs associated with moving crude oil out of Canada by rail are reflected in the price spread between Western Canada Select (WCS) in Hardisty, Alberta, and West Texas Intermediate (WTI) in Cushing, Oklahoma. WCS prices averaged $38 per barrel (b) in March 2018, $25/b less than WTI (compared with an average price spread of $13/b in March of last year). The price spread between WCS and WTI narrowed to $16/b in early April, suggesting some constraints have eased. The smaller price spread may have occured because low prices led some Canadian crude oil producers to reduce output and move forward planned maintenance and turnarounds, which reduced the current need to move crude oil by rail (Figure 2).
Of the 53,000 b/d year-over-year increase in U.S. imports of Canadian crude oil by rail in 2017, almost half (23,000 b/d) went to the U.S. Gulf Coast, or Petroleum Administration for Defense District (PADD) 3 (Figure 3). Although pipelines, reversed in 2014, are responsible for most of the Canadian crude oil reaching PADD 3, rail volumes have been a contributing factor. In 2017, the U.S. Gulf Coast imported a total of 3.1 million b/d of crude oil. Crude oil from Canada accounted for 384,000 b/d (12%) of those imports, 70,000 b/d (18%) of which were imported by rail.
With an API gravity of approximately 20 degrees, WCS crude oil is classified as a heavy crude oil and is attractive to Gulf Coast refiners that invested heavily in refinery units that process heavier crude oil. Traditional suppliers of heavy crude oil into PADD 3, such as Venezuela and Mexico, have experienced production declines that have resulted in lower exports, making Canada an increasingly important source of imported heavy crude oil. In January, the U.S. Gulf Coast imported more crude oil from Canada (448,000 b/d) than from Venezuela (438,000 b/d) for the first time on record (Figure 4). Since the removal of restriction on crude oil exports from the United States, Canadian crude oil can also be re-exported from the Gulf Coast without having to be segregated.
Large-scale and sustained increases in crude oil by rail volumes from Canada face several obstacles from within the Canadian rail industry and competing pipeline projects. Trade press reports indicate that before investing, Canadian rail companies demand that crude oil producers enter long-term commitments for crude oil-by-rail capacity. Canadian crude oil producers are reluctant to agree to long-term rail commitments because pipeline capacity could increase in the short to medium term. For example, the constraint on the Keystone pipeline could be removed with regulatory approval, and expanded capacity on the existing Enbridge pipeline system is expected within two years. In addition, the expansion of the Trans Mountain pipeline from Alberta to an export facility on Canada’s west coast would, if built, add an export outlet for Canadian crude oil other than the United States.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased over 5 cents from the previous week to $2.75 per gallon on April 16, 2018, up 31 cents from the same time last year. Rocky Mountain prices increased nearly 10 cents to $2.73 per gallon, Gulf Coast prices increased over 7 cents to $2.50 per gallon, Midwest and East Coast prices increased 5 cents to $2.60 per gallon and $2.69 per gallon, respectively, and West Coast prices increased nearly 4 cents to $3.37 per gallon.
The U.S. average diesel fuel price increased 6 cents to $3.10 per gallon on April 16, 2018, 51 cents higher than a year ago. West Coast prices rose over eight cents to $3.58 per gallon, Gulf Coast prices rose nearly seven cents to $2.91 per gallon, Midwest prices increased nearly six cents to $3.02 per gallon, and Rocky Mountain and East Coast prices rose five cents to $3.14 per gallon and $3.12 per gallon, respectively.
Propane/propylene inventories rise slightly
U.S. propane/propylene stocks increased slightly last week to 35.9 million barrels as of April 13, 2018, 11.1 million barrels (23.6%) lower than the five-year average inventory level for this same time of year. Gulf Coast inventories increased by 0.2 million barrels, while East Coast and Rocky Mountain/West Coast inventories rose slightly, remaining virtually unchanged. Midwest inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 7.3% of total propane/propylene inventories.
