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Canadian crude oil train derailments, closing USGC arb threaten rail exports

Many analysts have forecast that strong US Gulf Coast demand will help boost rail shipments of Canadian crude oil to records this year.

But recent pricing dynamics and new regulations following the second derailment of a Canadian crude train in two months highlight the risks facing the most optimistic projections.

Alberta Premier Jason Kenney estimated in a recent interview with S&P Global Platts that crude-by-rail shipments out of Western Canada would average 500,000 b/d this year, a level that would require strong USGC demand for Canadian barrels.

Go deeper: Capital Crude podcast – interview with Jason Kenney, Alberta Premier

Western Canadian Select at Hardisty, Alberta, was heard to trade Thursday at WTI CMA minus $16.95/b. WCS at Nederland, Texas, was last assessed at minus $4.30/b, putting the spread between the two locations at about $12.55/b.

Western Canadian Select arbitrage and exports by rail

Because it costs about $12/b to ship crude from Hardisty to the USGC on a committed rail contract, the current spreads are nearly uneconomical. Spot rail, which is what may shippers rely on when they can not get space on pipelines out of Canada, can cost from $15/b to $18/b.

Still, simulated coking margins across a spectrum of transport costs suggest WCS remains profitable for USGC cokers, including non-committed rail freight as high as $22/b, according to Platts calculations.

Nevertheless, should the Hardisty/Nederland spread narrow further, even pipeline shipments may come under pressure. The pipeline tariff from Hardisty to USGC is somewhere between $8/b to $12/b, with traders often saying there needs to be a $10/b spread between Hardisty and USGC to be economical.

The differential for WCS at Hardisty has strengthened in recent weeks after extreme cold in January disrupted production, according to traders. The same grade has weakened on the Gulf Coast as rising shipping freight costs have prevented exporters from moving heavy Canadian crude on the water.

Rail export pattern

A narrowing WCS price spread between Alberta and the USGC has dramatically cut rail exports out of Canada in the past.

When the price difference between the locations narrowed to an average of $11.64/b in January and February of 2019, rail exports out of Western Canada plunged to 132,426 b/d in February of that year, down from a record 353,789 b/d in December, 2018, according to data from the Canada Energy Regulator.

The latest official statistics from Canada’s government show rail exports at 297,476 b/d in November, when the spread between Hardisty and Nederland averaged $14.46/b, $2.10/b wider than the last pricing levels heard Thursday.

S&P Global Platts Analytics sees rail volumes reaching new highs of more than 400,000 b/d in the first quarter of this year before dipping in the second quarter as producers perform seasonal maintenance. Platts Analytics sees exports then rising to more than 400,000 b/d again in the fourth quarter.

Another risk to forecasts for surging rail exports is that the country’s transport ministry last week ordered trains carrying crude oil and other “dangerous” goods to observe a speed limit for 30 days.

One trading source with a background in rail operations said the speed limit, which took effect February 7, may decrease crude-by-rail exports by about 10% as long as the restriction remains in place.

The government order came after a Canadian Pacific train derailed February 6 in Guernsey, Saskatchewan, causing 31 of 104 cars to leave the track and about 12 of them to catch fire, local media cited the Saskatchewan Public Safety Agency as saying. Another Canadian Pacific train carrying crude derailed in the same location in December.

The post Canadian crude oil train derailments, closing USGC arb threaten rail exports appeared first on Platts Insight.

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