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100--ANALYSIS: Canadian heavy crude stays weak as market waits for rail

Houston (Platts)--8 Mar 2018 556 pm EST/2256 GMT


Western Canadian heavy crude differentials have another hurdle to overcome before an expected rebound later this year: higher crude-by-rail exports seen late last year are not expected to have carried over into January and February because of bad weather and competition from other commodities.

"I think what you'll see is that volumes were flat-to-down slightly in January as volumes into and out of the holiday season looked to have slowed," said Matt Murphy, an analyst at energy-focused investment bank Tudor, Pickering, Holt & Co.

The latest data from Canada's National Energy Board show crude-by-rail volumes out of Western Canada rose 19.5% year on year to 152,151 b/d in December. Though the December figures are higher compared with the year-ago period, they are still less than the 155,655 b/d exported in March 2017 and 175,654 b/d exported in December 2014.

When differentials for Western Canadian Select at Hardisty widened to as much as the front-month NYMEX light sweet crude futures contract calendar month average (WTI CMA) minus $41.75/b in November 2013, Canadian crude-by-rail volumes exports rose to 166,570 b/d in December of that year, a 33% jump compared with December 2012. Discounts often widen to account for the more expensive rail transport.

WCS at Hardisty was heard to trade at WTI CMA minus $26.50/b Thursday, firming slightly after falling for three days. The differential for WCS at Hardisty has widened from a discount of $14/b in November, before the temporary shutdown of TransCanada's 600,000 b/d Keystone pipeline on November 16 and its restart at reduced pressure on November 28. TransCanada has declined to say how much crude is currently flowing on the pipeline, and estimates have varied widely.

"I'd say it's certainly a step in the right direction, but more is needed to clear the market," Murphy said of the higher rail volumes out of Canada in December.

The NEB is scheduled to release crude-by-rail statistic for January the week of March 26.

Canadian rail carriers struggled early this year with extreme cold and snowfall.

Oil services company Halliburton said Canadian National Railway's delays in delivering frac sand would hurt its profit in the first quarter.

CN replaced its Chief Executive Officer on March 5, and new interim CEO Jean-Jacques Ruest apologized in a statement Wednesday for not meeting the expectations of its grain customers.

"CN has experienced rapid growth across the company, with the business up 10% in 2017," Canadian National spokesman Patrick Waldron said in an email to S&P Global Platts.

"Much of that traffic growth is focused in Western Canada and that rapid growth combined with challenging winter conditions this year has presented some operational challenges and congestion on key corridors," he added.

Waldron said the company has taken steps to meet its customers' needs including, "adding 100 additional short-term leased locomotives and hiring 400 new conductors in the first three months of the year."

CN competitor Canadian Pacific has expressed less enthusiasm for shipping crude in general.

CP President and CEO Keith Creel said during an earnings call in January that the company is not interested in partnering with companies that ship only crude and prefers contracts with more diversified firms.

Producers are counting on increased rail shipments to clear the glut of crude that has accumulated in Alberta. More Canadian crude will likely moved by rail to the US by the middle of the year, which should take pressure off WCS crude prices, Alex Pourbaix, president and CEO of Cenovus Energy, said earlier this week.

The current imbalance in takeaway capacity is "relatively small," he said on the sidelines of the CERAWeek by IHS Markit conference.

"We are not talking millions of barrels," Pourbaix said. "[But] a very, very small imbalance in takeaway capacity can drive really wide differentials."

There is "probably 300,000 b/d plus of rail loading capacity that is presently idle [in Alberta]," Pourbaix said. "So just getting a fraction of that rail loading capacity moving should significantly mitigate the wide differentials we are seeing."

Tudor, Pickering, Holt analyst Murphy said he expects crude-by-rail volumes out of Canada to be down marginally in January with February volumes up marginally from December.

"I think what's important is that it looks like it's remained in pretty much the same ballpark on our estimates (150-170,000 b/d) when industry needs it to be picking up in a big way," Murphy said in an email. "This is really why we think differentials have remained as wide as they have."

Tudor, Pickering, Holt last week revised its price forecast for WCS at Hardisty, saying it is likely to trade at a discount of $19-$20/b to the WTI CMA at the end of 2018 rather than dip down to a range around minus $18/b in the second half as previously forecast.

"While we don't believe a $25/b (discount) reflects a normal market, we think calls for $15/b differentials don't reflect how the market has shifted," Murphy said in the report.

--Pat Harrington, patrick.harrington@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com




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