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Start of TMX Raises the Ante for a Sour Barrel

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The much-anticipated start of the Trans Mountain expansion (TMX) became a reality on May 1, adding 590 Mb/d of egress capacity from Western Canada. With the start of deliveries to TMX, producers are optimistic that direct access to export markets will elevate historically discounted Western Canadian Select (WCS) prices for heavy sour crude from the oil sands.

The Western Canadian Sedimentary Basin (WCSB) produces an important barrel for US refiners. About 70% (2.92 MMb/d) of the crude imported from Canada is a heavy sour barrel, primarily sold as feedstock to refineries.Picture1-May-23-2024-09-16-34-4293-PM

Demand for WCSB crude remains strong despite strong supply growth from the Permian Basin. The Permian yields a light sweet oil with >50 API gravity, and cannot replace a heavy sour barrel (~20 API gravity) in the market. US refiners are mainly equipped to refine heavier crude of a sour quality (i.e. at least 0.5% sulfur content). The average crude oil input to refineries is a sour barrel with a 33 API gravity and 1.3% sulfur content, according to Energy Information Administration (EIA) data. To optimize refinery performance and balance abundant US light crude production, 91% of US crude oil imports have an API gravity under 35.

In the Crude Hub Model, East Daley expects initial volumes for TMX will come from displacement of exports to the US. As TMX gains momentum and reaches minimum volume commitments (MVCs) of 470 Mb/d by 3Q24, flows decline on Enbridge’s (ENB) Mainline, TC Energy’s (TRP) Keystone, and ENB’s Express Pipeline.

Over time, WCSB producers grow production into the additional TMX capacity and replace barrels lost in the Midwest and Gulf Coast (see figure). We model WCSB production to grow by 295 Mb/d through YE24, and ~500 Mb/d through YE25 and 1Q26. By that point, WCSB supply growth would fill the takeaway created by TMX and bring pipes from the WCSB to over 90% utilization in the Crude Hub Model. All volumes initially displaced by TMX would be replaced on the Enbridge Mainline, Express and Keystone pipelines in the model. - Kristine Oleszek Tickers: ENB, TRP.


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