The price of Canadian heavy crude is currently trading at a whopping $30-plus per barrel less than U.S. light oil, but the spread should narrow as more crude by rail comes online, analysts said on Thursday.
Crude by rail traffic has hit record levels this year and is expected to continue increasing until additional export pipeline capacity is completed out of western Canada.
Carloads reached 200,000 bbls/d for the first time earlier this year, and GMP FirstEnergy expects this may rise to 400,000 bbls/d this winter.
The surge in demand has been challenging for Canada’s rail companies, analysts said.
“The very wide differentials we are seeing in recent weeks are reflective of what in our view is a temporary situation where the need for crude by rail is exceeding the logistical capabilities of the rail companies (CN and CP) to move those volumes. Both CN and CP have been on a hiring spree.
“CP has an ample excess supply of diesel locomotives (more than 400 in storage as of year-end 2017) and CN expects to take delivery of ~60 this year, and ~140 in 2019/2020, so we do not expect locomotive availability to be a limiting issue beyond this year. Rather, we suspect that room on the rail lines and staffing are the current bottlenecks.”
GMP FirstEnergy expects crude by rail ease back to approximately 300,000 bbls/d next year.