The Crude Report: Argus introduces Canadian High-TAN assessments

Author Argus

A podcast episode highlighting the introduction of a new Canadian High-TAN price assessment at Houston and Cushing, as well as providing updates about Argus WCS Houston and ICE ARV.

In this episode, Argus experts Jeff Kralowetz, VP, Business Development and Alex Endress, Senior Crude Reporter, highlight the introduction of a new Canadian High-TAN price assessment at Houston and Cushing, and update the audience on the continued growth, liquidity and transparency of Argus WCS Houston and ICE ARV.  

Webinar: Global crude oil markets - 2021 mid-year review

Transcript

Jeff: Hello, everyone. And welcome to this episode of "The Crude Report." This is a series of podcasts looking at what's new in global crude oil markets. My name is Jeff Kralowetz. I'm the vice-president of business development for Argus in Houston. And with me today is Alex Endress. He's a senior Crude Reporter in Houston, and Alex is the person who does the daily coverage of Canadian crude traded in U.S. markets. So Alex, welcome.

Alex: Yeah. Jeff, glad to be here. Thanks for having me.

Jeff: You bet. It looks like our timing on this podcast is pretty good for two reasons. First, at the end of June, we began publishing price assessments for high TAN Canadian crude at Houston and Cushing. But secondly, the last trade month, we also saw a record volume of physical trade on the Canadian grades that set our WCS Houston price assessment.

And of course, that's really important to us because WCS Houston is the benchmark grade for Canadian crude at the Gulf Coast. And WCS Houston is also a precisely hedgeable number using the Ice ARV financial contract. So we'll get into all of that in a little bit, but maybe we could start out with the basics. Alex, what's the high TAN name mean? How is Argus structuring a high TAN assessment, and why did we choose to introduce it this summer?

Alex: Sure. High TAN refers to crude that have a relatively high total acid number. This comprises a lot of the new grades that are being produced in Canada and coming to the U.S. So the new Argus high TAN prices are in Houston and Cushing and those are Access Western Blend or AWB and Christina Dilbit Blend or CDB trades that are actually comprising these high TAN prices.

So why those two? Well, we've heard that they have higher volume. Really, if you look in those markets, the most liquidity out of the high TAN grades that are getting delivered to the U.S. have a very similar in quality. We see AWB at about 22 and a half degrees API, and a 3.76% sulfur and CDB at about 22.3 degrees API, and 3.66% sulfur. Similar to WCS and Cold Lake, they may differ a bit in Canada, but once delivered to these markets and Cushing and Houston, they've traveled many miles of pipeline and probably been through the same tanks in the end. Buyers treat them very similarly.

And so we're responding to the market. We've hit kind of a critical mass where there was somewhat consistent volumes of trade at Houston and Cushing. Argus is able to get these trades reported to us.

Jeff: Yeah, those are great points, Alex, -- especially the fact that when we went to the industry and asked how should we structure these assessments, they said, "Look, these grades, AWB and CDB, are trading within 5 cents of each other. You really should pool the liquidity and get a good, strong representation of the market." But anyway, the next thing I think is how would market participants use the high TAN assessment?

Alex: Yeah. I mean, so there are several ways. If you're looking at, you know, like a long-term supply agreement, there's the ability to put that Argus high TAN price in a physical contract. For example, even outside of AWB or CDB, maybe there's a Kearl supply agreement or another high TAN grade. You could price it at the Argus high TAN assessment either in Cushing or Houston with some sort of adjustment to account for the quality spread.

Now there's also the arbitrage comparison. So because we now have high TAN assessments at Hardisty, Cushing, and Houston, traders could make this comparison as they have for WCS in Cold Lake. So, you can use the spread between Argus high TAN Houston, and Argus AWB and CDB assessments in western Canada to help decide whether to move a high TAN cruise to the Gulf.

Right now, the Canadian high TAN Houston premium to Access Western Blend in Edmonton is $9.04 a barrel for August delivery. So the Houston area premium to Christina, Lake, at Hardisty is about $8.90 a barrel. Part of that price difference could be the difference in the assessment points in Canada. You can also even use the Argus WCS Houston price and the Ice ARV contract to hedge high TAN deals with the Gulf Coast. So you could hedge a physical deal for high TAN with ARV financials by doing the physical deal on Argus WCS Houston, then adding the WCS Houston-to-high TAN Houston spread to adjust the price.

Jeff: So yeah, that's all really important stuff. Thanks for sharing that -- the fact that we can capture the Canada to Gulf Coast spreads, but also the fact that you could use the high TAN number along with the WCS Houston number to precisely hedge your position. And maybe this is a good point, Alex, where you could get into a little bit of the history of the WCS number, which is the hedgeable Canadian number at the Gulf Coast.

Alex: Yeah. So as we mentioned at the top of the podcast, WCS trade volumes really have been soaring. They set a record in July. So for the July trade month, we recorded 328,884 barrels a day. And so far for August trade month, we're already tracking about 242,000 barrels a day. That would be the third-highest tally if the August trade month ended today. But as of the day we’re recording this, there are still six more days left in the August trade month. This means that the physical market providing the settlement mechanism for the Ice ARV financial contract is exceptionally liquid, transparent, and robust.

There are around 22 companies trading WCS Houston. So even with that high volume of trade, no one company has more than 20% of the market share.

We typically see multiple trades per day. So the published Argus WCS Houston price is normally set by a VWA or a volume-weighted average of trades for Cold Lake and WCS. We include three Houston area locations: Beaumont, Nederland and the ECHO terminal in Houston.

Jeff: And just to highlight -- because not everyone will know this -- the WCS Houston number is actually a composite or a collection of all the Cold Lake and WCS trades at the Gulf Coast. Just like the high TAN is a collection of CDB and AWB trades. Can you just clarify for us exactly what goes into that WCS number?

Alex: Yes. So the assessment includes both WCS and Cold Lake volumes. And what we found is that Cold Lake really is the much more liquid grade. So for example, despite the record volumes in July, Argus didn't actually record any WCS trades in the Houston area. So the WCS Houston published price was set entirely by Cold Lake trades in the Houston area. Likewise, we didn't report any WCS physical trade volumes for May, June or July – the Argus WCS Houston price assessment in those months was set entirely by Cold Lake trades in the Houston area. So far in August, we have 5,000 barrels a day of WCS in the Houston area for Argus.

We began including these Cold Lake volumes in our WCS Houston and WCS Cushing price assessments back during the February 2019 trade month after the industry advised us to do so. Similarly, the industry advised us to include both AWB and CDB in our High TAN Houston and High TAN Cushing price assessments. We found that, you know, after these grades traveled down the same routes and hit some of the same tanks to get to Cushing and then to the coast, they looked the same (in terms of their value) to buyers.Again, the industry just advised us to pool the liquidity since they trade within 5 cents of each other and much of the time at parity. 
The same is true at Cushing as it is in the Houston area. The WCS Cushing assessment also is a composite, although Cushing sees a higher percentage of WCS and lower percentage Cold Lake. For example, we recorded 13,548 barrels a day of WCS trades in the Cushing market for July versus 165,632 barrels a day of Cold Lake Cushing for July.

Jeff: Great. So just to summarize, in Houston, the WCS Houston number is largely reflecting Cold Lake trades at the Gulf Coast at Houston area. Whereas Cushing, it's more of an even mix between Cold Lake and WCS. So let's move on because we're running out of time.

I think one of the interesting aspects of the heavy Canadian trade at the Gulf Coast is that a lot of it gets re-exported to places like India and China, sometimes even to Spain..

Enbridge in a recent statement said, they think re-exports of Canadian heavy out of the Gulf Coast will hit 300,000 barrels a day in the next year or so. That means that the WCS and high TAN prices are really important internationally to buyers in Asia and Europe. And it also means that the WCS Houston number can be used to hedge foreign shipments of Canadian grades out of the Gulf Coast.

So yeah, I'm getting to the question, which is, I think these international buyers would be interested in whether you think the flow of Canadian crude physically to the Gulf Coast is going to continue at current levels, even though price spreads are a little bit narrow right now.

Alex: Yeah. I mean, I would say that, of course, we have seen the flow of Canadian crude to Texas in particular rise fairly steadily over the last few years, regardless of the momentary moves of the price spread from Canada to the Gulf Coast. We do think more Canadian crude is getting to Texas and that can be illustrated by what we have seen in the spot market.

So as we've seen this record liquidity that's been bolstered really by the rising WTI calendar month average price that serves as the basis for these grades, we've actually seen the WCS Houston discount to the CMA begin to widen.

That just tells us that light sweet prices in Cushing are being supported by this rebounding transportation fuel demand with increased vaccination rates and diminishing COVID-19 restrictions. We're also seeing, you know, that higher outright price is allowing more Canadian sellers to target the buyers in the U.S. So talking about the CMA, you know, it's actually averaging $73 a barrel for August as of yesterday's close. That'd be the 14th as of recording this podcast.

And so that's the highest Nymex Cushing calendar month average that we've seen since the December 2014 trade month. And back on the WCS front, WCS Houston's price is averaging a $5.07 month-to-date discount to the CMA. That is the widest discount since the May 2020 trade month.

So it's obvious that we're seeing more Canadian crude get down to the coast, as you mentioned. The WCS Hardisty to Houston discount is averaging an $8.50 spread for August, not exactly the most favorable. But as we said, the higher basis price is still allowing more to get to the U.S. and to the coast. Although it's delayed, we see the most recent data from the EIA suggest more Canadian supplies coming to the coast.

Texas imported 356,000 barrels a day of Canadian crude in April. That's up from just 19,000 barrels a day from March. April’s import number for Canadian crude in Texas was the second straight gain after an extreme winter storm and mid-February severely constrained refining capacity in the region and cut Texas imports of crude in general. 
As you mentioned, there were some other factors at play. Venezuelan crude is sanctioned, Mexican output is stagnant, and of course, most middle Eastern heavy grades are going to Asia, not across the Atlantic. Also, U.S. refinery utilization is back to pre-COVID levels of the coast, and they definitely like to run heavy sour crude. Some of them like to produce asphalt, which several Canadian heavy grades are good for.

Jeff: Yeah, that's great. And I think all those points about the diminishing availability of alternatives to Canadian at the Gulf Coast are important. You know, the Venezuela and the Mexican, the middle east grades just aren't available like they were in the past. And even with narrow spreads to Canada, you tend to get this draw on Canadian barrels. I tell you what, Alex, I'm looking at the clock. We should probably wrap it up here.

So thank you very much for explaining what's going on with heavy Canadian crude markets at the Gulf Coast, and thanks to everybody in the audience for joining us. You can read Alex's daily market commentary and see our whole array of U.S. Canadian crude pricing by subscribing to the Argus America's Crude Report.

And there's a second report, the Argus Petroleum Transportation North America, which covers the logistics of moving crude and refined products and NGLs around North America that comes out on Friday afternoons just to once a week. And it's really an important read. There's also a lot of free information on our website, which is Argusmedia.com. So thank you again for tuning into this. We look forward to joining you with another episode of "The Crude Report" very soon.
 


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