The Daley Note: January 12, 2023.
On December 29, TC Energy’s (TRP) Keystone pipeline resumed operations on its Cushing pipeline segment, ending a three-week outage. The extended pipeline shutdown disrupted crude oil deliveries from Western Canada and could boost late-4Q earnings for some midstream companies.
TRP closed the Keystone segment on December 8 after detecting a leak near Steele City, NE. In its latest statement on the incident, TRP said it will operate the pipeline under “additional risk-mitigation measures,” which include 24/7 monitoring and reduced operating pressures.
WCSB prices have weakened since Keystone halted service, highlighting constraints moving crude out of Canada. Western Canada Select (WCS), the benchmark for Canadian crude, traded as much as $30/bbl behind WTI, equating to a $4 move lower since the accident. The impact has been evident in the Energy Information Administration’s (EIA) weekly petroleum status report, which shows imports into the PADD 2 Midwest region have dropped by ~600 Mb/d over the last three weeks.
East Daley’s Crude Hub Model balances and forecasts flows by pipeline, in and out of the major crude hubs and export docks across North America. We analyze crude pipeline flows and capacity by major hubs across the U.S. and forecast crude production by basin. Reach out for more information on the Crude Hub Model.
A prolonged outage would pose risk to crude oil stocks at the Cushing hub, which have been hovering near dangerously low levels just above the facility’s lower operational limit of ~20 MMbbl. However, data over the last three weeks show Cushing inventories have held steady at ~25 MMbbl.
Based on our Crude Hub Model, East Daley thinks increased northbound flows from the Permian Basin and lower refinery utilization helped balance for the temporary reduction in Canadian imports. Since the restart of the Keystone leg, price spreads from Western Canada have moved back to pre-accident levels, with WCS trading ~$26 behind WTI. The steep discounting for WCS holds at this level in the forward curves through 1Q23. It’s not until later in 2H23 when the spread tightens by ~$6, likely due to the expected in-service of the Trans Mountain pipeline expansion.
We expect some midstream companies to take advantage of the Keystone outage. Plains All American (PAA) has a proven track record of performing well when the WCS-WTI differential widens. The same move in regional prices helped the company beat consensus in 3Q22, and we believe it could be a similar story for 4Q22. Pembina Pipeline (PBA) also has some exposure to the spread through its marketing arm. Enbridge (ENB) should also see higher earnings from increased throughput on its Mainline. However, due to the size of ENB, the impact on its bottom line is relatively small. – AJ O’Donnell Tickers: ENB, PAA, PBA, TRP.
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