ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future

ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future
Updated 25 November 2018

ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future

ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future

Faisal Mrza RIYADH: Crude oil prices continued their downward fall last week, reaching their lowest level in more than a year, almost 30 percent lower than in last October. Brent crude ended the week at $58.80 per barrel and WTI fell to $50.42.
The steep slide started in early November from oversupply concerns that put bearish pressures on market sentiments. A worldwide glut is the major concern for futures, while the prompt physical market is balanced.
The real physical supply concern must be focused on the pipeline constraints that weigh on Canadian heavy crude. The Western Canadian Select (WCS) benchmark dipped to a record low last week, down to $11 per barrel, with pipeline demand far over capacity. This is the lowest since the financial crisis of 2008.
Although Canada has 10 percent of the world’s oil reserves, 95 percent of these reserves are heavy unconventional oil in the Canadian Oil Sands, located in the province of Alberta in the west.
Due to a geographical infrastructure imbalance, the capacity of the Canadian refineries, which reaches about 1.9 million barrels per day, is mostly located in the east.
In fact, the Canadians import oil to supply their eastern refineries. Therefore, Canada cannot take full benefit from its oil sands. It exports nearly all its oil production to the US at a steep discount. Due to the lack of appropriate infrastructure, the loss to the Canadian economy stands at $80 million per day.
Output from Canada’s oil sands is far beyond pipeline capacity to its US markets. Two pipeline projects that should have helped are still tied up in legal proceedings. The TransCanada Keystone XL pipeline is supposed to begin near Hardisty, Alberta, Canada and end in Steele City, Nebraska, US. It would have the capacity to deliver up to 830,000 barrels of oil per day. On Nov. 8, a US court issued an order blocking construction until an additional environmental review is conducted.
The existing Trans Mountain pipeline carries 300,000 barrels of crude and refined oil per day from Alberta to the west coast of British Columbia, Canada. Construction was supposed to begin this year on a 590,000-barrel expansion to the pipeline. However, in August 2018, on the same day that approval came for the pipeline to be sold to the Canadian government, an ongoing court battle blocked the permit for the pipeline expansion.
With pipelines over capacity, Canadian producers are moving their crude oil by rail. Crude-by-rail loadings at monitored terminals in Western Canada reached a record high monthly average of 274,000 barrels per day in October, according to Genscape Inc. data. This is more than double a year ago. The situation is dire. For the week ending Nov. 9, crude inventories at five monitored terminals in Western Canada reached 34.2 million barrels. The discount on Canadian crude is so high that some US refineries are reselling the oil outright rather than processing it.
The Canadian government is working on a deal to buy trains to move an additional 120,000 to 140,000 barrels of crude per day. Shipping crude by rail has its detractors, however. Opponents of the practice call the transportation method “bomb trains,” and claim that spills and deaths are inevitable when crude-by-rail shipments increase. As oil takes over the railways, overall shipping costs go up as capacity is strained. Pressure builds on the rail network, resulting in shipping delays for other goods. And Canadian production will continue to rise. Imperial Oil will move forward with construction of its $2 billion Aspen project in northern Alberta. The 75,000 barrel per day project is expected to begin producing in 2022.
The oil industry had hoped that well-maintained pipelines would last forever. A major spill from the Enbridge pipeline in 2010 showed that even with excellent maintenance and surveillance, it is difficult to keep pipelines running incident free. More than 40 percent of US oil pipelines were built in the 1950s and 1960s. In Alberta, at least 40 percent of the pipeline network was built before 1990.
Corrosion is a major issue. Pipeline companies fight rust corrosion through the use of coatings and cathodic protection. But with time, all coatings fail, and the level of expenditure increases for inspection and maintenance to keep pipelines intact. When downtime on the pipelines is required for maintenance, this disrupts crude oil flows.
For now, Canada will move forward with the expansion of crude oil rail shipments. A study from Carnegie Mellon University found that the environmental and health costs of transporting oil by rail are double the cost by pipeline. But with Alberta desperate to relieve the pressure on oil storage in the province, it is certain that for the foreseeable future rail shipments of Canadian crude are the only option.

Faisal Mrza is an energy and oil marketing consultant. He was formerly with OPEC and Saudi Aramco. He is the president of #Faisal_Mrza Consulting. Twitter: @faisalmrza


Global shares, oil prices falter as US stimulus buzz fades

Global shares, oil prices falter as US stimulus buzz fades
Updated 37 min 48 sec ago

Global shares, oil prices falter as US stimulus buzz fades

Global shares, oil prices falter as US stimulus buzz fades

LONDON: Global shares stumbled on Friday as hopes of a fiscal boost from a $1.9 trillion US stimulus plan were smothered by the prospect of stricter lockdowns in France and Germany and a resurgence of COVID-19 cases in China.
European stocks followed Asian markets lower, with the pan-European STOXX 600 down 0.8 percent and London’s FTSE 100 0.8 percent weaker, with the latter clobbered by data showing Britain’s economy shrank in November for the first time since the initial COVID-19 lockdown last spring.
The MSCI world equity index, which tracks shares in 49 countries, was 0.3 percent lower. S&P 500 e-mini futures shed 0.3 percent to 3,779.
Oil prices, which had risen on a weak dollar and strong Chinese import data, dropped as COVID-19 concerns in China hit sentiment.
Brent was down $1.33, or 2.3 percent, after gaining 0.6 percent on Thursday. US West Texas Intermediate crude was down $1.17, or 2.1 percent at $52.44 a barrel, having risen more than 1 percent the previous session.
Brent and US crude were heading for their first weekly declines in three weeks.
Spot gold rose 0.1 percent to $1,847.00 per ounce.
While oil producers are facing unparalleled challenges balancing supply and demand equations with calculus involving vaccine rollouts versus lockdowns, financial contracts have been boosted by strong equities and a weaker dollar, which makes crude cheaper, along with strong Chinese demand.
“The recent resurgence in coronavirus infections, appearance of new variants, delayed vaccine rollouts and renewed lockdown measures in most major OECD economies has clouded the economic and demand recovery,” said Stephen Brennock of oil broker PVM.
“Simply put, near-term demand expectations aren’t too promising.”
Earlier on Friday, an Asian regional share index had edged near record highs after US President-elect Joe Biden proposed a $1.9 trillion stimulus plan to jump-start the world’s largest economy and accelerate its response to the coronavirus.
In prime time remarks on Thursday, Biden outlined a proposal that includes $415 billion aimed at the COVID-19 response, some $1 trillion in direct relief to households, and roughly $440 billion for small businesses and communities hard hit by the pandemic.
But that initial boost later faded as risk appetite waned, lifting bond prices and the dollar, and hitting equities.
“People are saying it’s a big number but markets are almost acting like its a disappointment,” said James Athey, investment director at Aberdeen Standard Investments.
“I think maybe the market was pricing an additional $2,000 cheque going to the US population, but what’s being proposed is a top-up of $1,400 to take the total to $2,000 because $600 has already been agreed.”
Investors also digested the prospect of rising taxes to pay for the plan.
“The concern is what it’s going to mean from a tax stand point,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
“Spending is easy to do but the question is how are you going to pay for it? Markets often ignore politics but they don’t often ignore taxes.”
Biden’s comments came after US Federal Reserve Chair Jerome Powell struck a dovish tone in comments at a virtual symposium with Princeton University.
Powell said the US central bank is not raising interest rates anytime soon and rejected suggestions the Fed might start reducing its bond purchases in the near term.
Investor concerns over the prospects for a global economic recovery were raised after France strengthened its border controls and brought forward its night curfew by two hours to 6 p.m. for at least two weeks to try to slow the spread of infections.
German Chancellor Angela Merkel called for “very fast action” to counter the spread of variants of the coronavirus.
Chinese blue chips eased 0.2 percent, snapping a four-week winning streak, after the country on Friday reported the highest number of new COVID-19 cases in more than 10 months.
US earnings season kicked into full swing with results from JPMorgan, Citigroup and Wells Fargo.
JPMorgan Chase reported a much better-than-expected 42 percent jump in fourth-quarter profit on Friday, driven by the release of some of the reserves it had built up against coronavirus-driven loan losses.
Investors will be looking to see if banks are starting to take down credit reserves, resume buybacks, and provide guidance that shows the economy is improving, said Thomas Hayes, chairman of Great Hill Capital in New York.
In the currency market, the US dollar rose.
The dollar index was at 90.407 versus a basket of currencies, up 0.2 percent on the day.
It was on track for a weekly gain of around 0.4 percent, making this its strongest week since November.
Against the stronger dollar, the euro was down 0.2 percent at $1.21325.
US yields stepped back as risk appetite waned. Benchmark 10-year Treasury notes yielded 1.1039 percent, down from a US close of 1.129 percent on Thursday, while the 30-year yield dipped to 1.8451 percent from 1.874 percent.
In Europe, Italy’s bond market was poised to end the week calmer, as 10-year bond yields were down 2 basis points at 0.59 percent.
Italian Prime Minister Giuseppe Conte resisted calls to resign on Thursday after a junior coalition party led by former premier Matteo Renzi pulled out of the government on Wednesday and stripped it of its majority.