China Can’t Get Enough Of The World’s Cheapest Crude

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By Irina Slav

Canada’s oil industry woes have been a topic of discussion in the media for some time now, what with the persistent delays in the Trans Mountain expansion, unyielding opposition to anything that involves pipelines, and the growing crude production from the oil sands. The latest news, however, is good news. Chinese refiners are buying growing amounts of Canadian crude, taking advantage of a substantial discount in its price to the U.S. benchmark, brought about by the above combination of factors.

Earlier this month Bloomberg reported Chinese refiners were buying Canadian heavy that was trading at a discount of as much as US$50 to West Texas Intermediate. In a context of rising prices—all but Canadian crude, apparently—a $50-per-barrel discount is more than a good bargain. It’s an excellent bargain, especially for refiners who have just completed summer maintenance and plan to increase their imports on higher local fuel demand.

China purchased 1.58 million barrels of heavy Canadian crude oil for loading in September, up by nearly 50 percent compared to the 1.05 million barrels it imported from Canada in April, Bloomberg said last week, quoting data by cargo-tracking and intelligence company Kpler. These imports are seen to continue rising this month as well, amid the height of construction season ahead of winter in China.

This week, S&P Global Platts reported that Chinese companies had bought three cargoes of Canadian heavy crude, to load in Vancouver in November. More will follow: the huge discount of Western Canadian Select to WTI is not the only reason for this shift. The other reason has to do with supply. China’s two other main sources of heavy crude—Australia and Venezuela—are both going through a production decline albeit for different reasons.

While the Venezuela situation is clear and unchanged, Australian heavy crude production has been on the decline due to natural depletion, S&P Global Platts notes. In fact, Woodside, the operator of the field that produces one of its benchmark heavy grades, Enfield, plans to stop pumping oil at the field by the end of this year.

Currently, there is also the seasonal factor of construction: Chinese refiners use a lot of the heavy crude they import for the production of asphalt, to be used in road construction, under Beijing’s large-scale infrastructure plans. But even after this seasonal high, chances are Chinese refiners, state and teapots alike, will continue to take advantage of the low price of Canadian crude.

There are no signs that the pipeline situation in Canada will change anytime soon. There are also no signs that production growth will begin to slow. Canadian producers are pretty much in the same position as their U.S. counterparts with the exception of the difference in prices. They need to pump more because they have debts to repay and businesses to keep afloat.

The Chinese entrance into Canada’s heavy crude is the silver lining of Canada’s oil problems: if it weren’t for the hefty discount to WTI, the shipping costs would have remained too high to be attractive for Chinese refiners.

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