The expansion of the Trans Mountain pipeline (TMX) was anticipated to reduce the discount on Canadian heavy oil, specifically Western Canada Select (WCS), compared to U.S. crude. However, three months post-launch, the price differential has widened instead of narrowing.
Currently, WCS is trading approximately $15 per barrel below West Texas Intermediate (WTI), compared to a $11.75 discount on May 1, the first day of commercial operations for TMX. This is despite expectations that the additional 590,000 barrels per day (bpd) capacity would gradually bring the differential down to single digits.
Canadian oil companies have faced challenges with production outpacing pipeline capacity, leading to bottlenecks in Alberta. While TMX’s startup should have alleviated these issues, the anticipated price boost has not materialized. Factors contributing to this include increased competition from Mexican heavy crude imports and U.S. refinery outages, notably at ExxonMobil’s Joliet plant.
Despite the current challenges, executives from Cenovus Energy and Canadian Natural Resources remain optimistic about the future narrowing of the WCS discount. They believe that the operational status of TMX will eventually lead to a more favorable pricing environment.
Analysts have noted that while pipeline egress from western Canada is functioning well, elevated inventory levels in certain U.S. regions may be a hindrance. Additionally, weak demand from China, a major consumer of sour crude, is impacting heavy oil grades globally.
The main value of TMX may not solely lie in reducing the WCS differential but in minimizing the risk of significant price blowouts, which previously saw discounts exceed $40 per barrel.