China's Canadian oil binge to wind down as U.S. refiners ramp back up

China is finally getting a taste of Canadian crude, if only for a couple of months.

At least five tankers hauling as much as a combined 3.76 million barrels of crude have departed Vancouver for China since the start of September, Bloomberg ship-tracking data show.

The cargoes could push China’s purchases beyond 4 million barrels for the year, the most since 2012, government data show.

While this increase in shipments is largely due to lower demand from refiners along the U.S. West Coast that have shut temporarily for maintenance, it’s a sneak preview of the future Canadian oil producers envision after the long-awaited expansion of the Trans Mountain pipeline is completed, giving them greater access to markets other than the U.S.

“It behooves Canada to have more buyers for their crude,” Jennifer Rowland, an analyst at Edward Jones & Co., said by phone. “Getting that expansion pushed through is a way for them to tap another buyer.”

The U.S. takes about 99 percent of Canada’s crude exports, leaving the country’s oil producers hostage to a single market. U.S. West Coast refineries, particularly in Washington state, take the bulk of the oil that travels down the existing 300,000 barrel-a-day Trans Mountain pipeline.

A planned expansion of the line to 890,000 barrels a day would open up increased access to Asia, allowing Canada to diversify away from the U.S. But that project has been delayed by a court-ordered review and fierce opposition from British Columbia.

Connected to the U.S. by a network of pipelines and rail tracks, Canada sends the majority of its crude to refineries in the U.S. Midwest and Gulf Coast, National Energy Board data show. About six percent goes to refineries in California and Washington.

Chinese buyers have benefited from the cheapest Canadian crude prices in at least a decade. Heavy Western Canadian Select, an oilsands benchmark, fell to more than $50 below West Texas Intermediate futures last month and light Edmonton Mixed Sweet dropped to a $40 discount on Nov. 1, data compiled by Bloomberg show. Prices have since improved somewhat, with some Midwest refineries starting back up.

Chinese importers “would have to pay enough to make it worth the while of U.S. West Coast refiners to sell the Canadian barrels,” Sandy Fielden, director of research for the commodities group at Morningstar Inc. Otherwise, given how cheap Canadian crude has become, U.S. West Coast refiners are going to process as much as they can, "making money hand over foot,” he said.

U.S. West Coast refiners took less than 161,000 barrels of waterborne Canadian shipments during September and October, the lowest volumes since 2015, Customs data show. Those plants, as well as refiners in the rest of the country, are ramping up after fall maintenance.

The current surge of shipments to China probably won’t last much longer, Rowland said. “It makes sense right now for Asian buyers to step in while the U.S. buyers aren’t buying as much.”

© 2018 Bloomberg L.P

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