By Irina Slav
Chinese refiners have been buying a lot of Canadian crude oil in the last couple of months, taking advantage of the massive discount of Western Canadian Select to West Texas Intermediate. The purchases have given troubled Canadian drillers hope for the future that even without the Trans Mountain expansion their crude could expand on Asian markets.
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 reported last month, quoting data by cargo-tracking and intelligence company Kpler.
Last month, Chinese refiners continued buying Canadian crude, with tanker loadings bound for China reaching 3.76 million barrels since the start of September, Bloomberg ship-tracking data reveals.
Now, this is not a whole lot of oil. If it were a million barrels daily, then we could probably speak of a seismic shift in the export markets of Canadian crude, a shift that would make it more competitive by introducing another buyer besides U.S. refiners. Even at the current level, though, the Chine refiners’ intake of Canadian crude indicates a change might be coming. Yet this change will only come if Chinese refiners can offer Canadian producers good prices that beat the prices that the U.S. West Coast refiners are prepared to offer.
We have yet to see how this plays out because the past two months were refinery maintenance season in the United States, and a lot of refineries have yet to ramp up to full production. This means that they have yet to ramp up their purchases of heavy Canadian crude that they need to make fuels. And this means the Chinese buyers have yet to face the competition of the U.S. refiners.
Chances are they will face it with a smile because 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. So, Chinese refiners simply don’t have much of a choice when it comes to sourcing the heavy crude blends that they need. When one supplier cannot deliver, you turn to whoever can.
This potentially huge market is what motivated the expansion of the Trans Mountain pipeline that turned into a bone of contention between neighbors British Columbia and Alberta. However, there is little chance the expansion will begin anytime soon, what with all the opposition and legal challenges from environmentalists and First Nations. Alberta is not giving up the fight, but it’s not making a lot of progress either.
Yet if Chinese refiners continue to buy Canadian crude even without the cheaper pipeline channel, it would significantly brighten the prospects of Canada’s oil industry. The problem is, “if” does not mean “will”. One additional reason for the surge in Chinese buying of Canadian crude this fall was the peak of construction season, hence an increased asphalt demand, hence greater heavy crude demand. As construction season reaches its end, this particular demand will decline with it. Yet if the price of Canadian heavy remains attractive even after U.S. refineries ramp up, Chinese companies may well continue to buy now that they’ve got a taste of it. Especially since Venezuelan production is still declining.