The Crude Report: Canada’s great escape

Author Argus

Much has been said about US president Joe Biden’s rejection of the Keystone XL project. The now-suspended project would have provided 830,000 b/d of pipeline capacity from Canada’s oil sands to the US midcontinent, but after years of delays, Canadian crude oil producers have been forced to seek other means of transportation. Crude-by-rail was an early outlet for incremental barrels, but other pipeline expansions are also underway.

In this episode of The Crude Report, our reporters Alex Endress and Brett Holmes discuss how the Canadian crude market has moved along despite Keystone XL and how Canadian crude prices are faring from Hardisty to the US Gulf coast.

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Alex Endress: Hello, and welcome to The Crude Report, a podcast series on global crude oil markets by Argus Media. I'm Alex Endress for Argus and I cover US Gulf coast crude markets. But joining me once again is Brett Holmes, our Calgary bureau chief that heads up coverage in Canada. Brett, thanks for joining.

Brett Holmes: Hey, Alex. Thanks for having me.

Alex: So today's discussion focuses on Canadian crude transportation from Alberta to the Lower 48 in the wake of the Keystone XL project's suspension. So that project would have provided 830,000 b/d of crude transport capacity from Canada's oil sands region to the US midcontinent, but after a number of legal obstacles on the US side, since the project's inception in 2008, it seems to be all but a foregone conclusion that it will not move forward. Crude-by-rail was an early outlet for incremental barrels, but other pipeline expansions are also underway.

First, just a quick recap on the project's history. So project planning began in 2008, and some construction was completed before it was blocked by former US President Barack Obama in 2015. And then it was renewed by former US President Donald Trump in 2017. Earlier this year, the Biden administration rescinded a cross-border permit for the project, seemingly marking the end of the road for the XL.

With that being said, Brett, what's going on with production in Canada right now? Has anything really changed since the Keystone XL suspension?

Brett: Hey, Alex. So I think not many are shocked by the suspension of Keystone with Biden coming into office. Having a bill would have been a couple years away still, but producers clearly had not pinned all their hopes and dreams on that single pipeline.

So looking at current production, Canadian oil has been on a steady increase, since about 600,000 b/d of heavy crude was shut in last summer from June to December. Then in the second half of last year, producers increased output in every month except one. And this was on route to a record high of 3.8mn b/d of output in December. And starting in December, Alberta's provincial government all but removed its curtailment order, giving producers a clear path to increasing output. So in turn, we've seen a return to midstream congestion, along with a rise in inventories. But that hasn't really translated into the deep discounts that heavy crude up here in Alberta is accustomed to, at least not yet. No doubt producers look forward to incremental capacity on existing pipelines, be it the original Keystone or Enbridge's mainline system, and of course, the TransMountain expansion to the West coast. So Keystone XL would have been very important for sure. But alternatives have cropped up and are on route right now, so in general, the market has sort of moved along despite Keystone XL's cancellation. And it seems like the demand side has also been somewhat unaffected. Is that what you've seen down your way, Alex?

Alex: That's right. And if anything, the heavy sour market might actually be oversupplied. So if we take a look at Argus prices, we'll see that WCS Houston for May delivery closed at a $3.55 discount to the CMA Nymex on April 23rd. And so that's the widest discount that we've seen so far since June 2020. And we're also seeing the Hardisty to Houston discount come in. So the May WCS Hardisty to Houston discount averaged about $7.95 for the May trade month, and that gap has been trending in towards since the beginning of the year, when January WCS Hardisty averaged a $13.55 discount to WCS Houston.

Now, we also saw a big dip in liquidity. So combined Cold Lake and WCS trade volumes in the Houston area totaled 57,754 b/d during the March trade month, and that's down from 229,166 b/d in the January trade month earlier in the year. And initially Houston area heavy sour, Canadian crude demand, it did sink as US refining capacity went offline, and that was a result of the severe winter weather that we saw earlier in the year. US Gulf coast throughputs were actually down by 3.9mn b/d – the week ended 26th of February – which actually surpassed shut-ins by Hurricane Harvey in 2017.

We have seen signs of recovery. So US Gulf coast liquidity for WCS and Cold Lake combined to 129,463 b/d during the April trade month, but the big discounts remain as coastal demand continues to recover, and as we've actually seen international heavy sour availability potentially growing. So the winter storm shutdown kind of kicked things off the US Gulf coast and more recently a fire damaging a Mexican refinery and rising Opec+ exports may be supporting supply availability. And as that's been happening, global demand is also a factor as India, the third largest oil consumer, is contending with record daily cases that are threatening to erode fuel demand.

So Indian crude imports actually fell by 6% in March from a year earlier as refinery run rates have declined a bit. And you know, another thing to keep in mind, Chinese demand seems to be coming back, but then again, as that may continue, it could be counterbalanced by this influx of competing crude that we could expect. And so, Brett, it does seem like you've actually seen some dipping in prices up in Canada. Has that been the case?

Brett: Yes, so a rising tide in global crude prices, coupled with historically narrow differentials at local hubs here in Canada, have contributed to a rare sense of optimism up here. So the heavy sour benchmark at Hardisty has been around a $12/bl discount level recently – so that is a bit weaker, as you described, Alex, although the differential has been a little bit stronger than what it typically is. So the differential had been as strong as $10/bl discount, or are tighter earlier this month even, so...but what I find most interesting is the flat price, which is not only recovered from the pandemic-induced lows of 2020, but it has risen to the highs not seen since early 2019. So, across the first quarter of this year, WCS settled at an average of $46/bl, and this actually represents almost an 80% increase from the same quarter last year. And it also represents the highest price since the second quarter of 2019.

Alex: So we also know that crude-by-rail has been increasingly popular over the past few years in the wake of just the delays we've seen on Keystone XL. But with both prices and production up in Canada, what's been new on that front? Has it increased in popularity?

Brett: Yeah, it's made a bit of a resurgence. Crude-by-rail has been on the upswing since collapsing last year as the pandemic started to begin, so the latest data point from this...last February, in 2021 here, was a bit weaker, around 112,000 b/d mark as production actually came off in Alberta a little bit, and the demand downstream took a hit as well as you described in the Gulf coast because of the winter storm. So in relation to the overall export picture, though, crude by rail has at times represented basically a midsize pipeline. It has been above 400,000 b/d twice, just before the pandemic began, and according to Canada's energy regulator, we have over 1mn b/d of loading capacity for crude-by-rail. So that capacity may not have been in place if Keystone XL had not been languishing in regulatory space and taking forever to get through the courts, etc.

So, basically, crude by rail operators have built out in excess of what Keystone XL could have provided anyhow. So with all the delays in Keystone XL and other pipelines, shippers and midstream companies alike had to get creative with getting product to market. So producers are in the business to make money. And when their product is in demand, they'll do the best to make that happen.

So crude-by-rail has seen its boom and bust over the last decade, of course, but it makes up a prominent place now for many producers in the portfolios. But some are starting to shed a little bit of their crude by rail portfolio, but others, that's sort of a mainstay, I think, and it's probably gonna be the case for some time. So some want that insurance and a lot will keep that in...crude by rail in their back pocket until even more progress is made with the pipeline files.

Alex: Yeah. And just to jump in there, in terms of new pipeline capacity, we are seeing progression on that front. So Enbridge is still moving forward with its Line 3 replacement project and that's on track to be completed later this year. So the project would increase the line's capacity from Alberta to Wisconsin by 760,000 b/d from 390,000 b/d. And beyond Line 3, Enbridge says it has the ability to increase delivery out of Canada by 450,000 b/d with its existing assets, and TC Energy, its original 590,000 b/d Keystone pipeline may also expand. So in late July, Trump signed a new permit that would allow that system's capacity to increase by 170,000 b/d. It remains to be seen whether the new administration would seek to revoke that permit as it did for the XL, but if not on a rail car or a pipeline to the US, incremental production may also find its way to the expanding TransMountain pipeline from Alberta to the Vancouver area and into the waterborne market.

So the pipeline's expansion would increase its capacity by 590,000 b/d to 890,000 b/d when it's complete at the end of 2022. So supply shipped on Trans Mountain could find a home at the US West coast or in Asia. Countries like China and India have already shown more interest in Canadian heavy supplies from the US Gulf coast. With all that being said, it seems like the main takeaways are that Canadian production is continuing to grow over the long term, and it's finding other routes out of Canada into the US. Ultimately, it seems like the need for the XL is being met by other remedies such as rail and some other pipeline projects. But Brett, did you have any other closing thoughts?

Brett: Sure. So there's been so much focus on Keystone that there's been a lot of other initiatives going on in the background that are helping the plight of the Canadian producer, be it crude by rail as we described, or those smaller expansions you already mentioned. All are very important and offer Canadian crude producers options to get their product to markets that really desire that Canadian crude.

Alex: Well, Brett, thanks for the insight. It'll be really interesting to see how the market continues to evolve around the absence of the XL.

And listeners, if you're in need of more in-depth daily coverage of US and Canadian crude oil markets, consider subscribing to Argus Americas Crude. You can find more information on this service at Thanks for tuning in. And we look forward to you joining us on the next episode of The Crude Report.

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