Never Say Goodbye, Part 4 - A Rebound in Canadian Crude-by-Rail May Not Come Until 2021

Western Canada’s relentless, decade-long increase in crude oil production began maxing out its export pipeline capacity in the past few years. With more supply than could be carried by pipelines, exporting crude by rail tank car became the next best alternative, leading to record amounts of rail-based exports earlier this year. However, this year’s wild swings in oil prices and COVID-led demand destruction resulted in drastic production cutbacks that freed up space on pipelines and put the kibosh on more expensive crude-by-rail, at least temporarily. Things are shifting again, though. With oil production recovering somewhat in the past couple of months and excess pipeline capacity dwindling, are we headed for a resurgence in the use of rail to export Canadian crude? Today, we conclude a series on Western Canada crude production and takeaway options with an analysis of what’s ahead for crude-by-rail.

Crude oil has been transported to market by rail tank car since the late 19th century, but pipelines overtook rail as a more reliable and cost-effective alternative early in the 20th. While pipelines remain the safest and cheapest means of delivering large quantities of barrels to refiners, moving crude by rail never really disappeared and has played a vital role in terms of destination flexibility and as an option when pipeline capacity is in short supply. That’s certainly been the case in Western Canada in recent years, as production growth outpaced the addition of new pipeline takeaway capacity and forced shippers to turn to rail with increasing frequency as a supplement to pipelines. That trend was interrupted this spring, however, when a combination of demand destruction and sharply lower crude oil prices spurred a sharp decline in production.

We initially explored the supply pullback in Part 1 of this series, where we computed a total output reduction of 940 Mb/d from just before the market’s downturn in February 2020 to the peak of the cutbacks in May. Most of that reduction was focused in Alberta’s oil sands and tied to a sharp decline in the price of the heavy oil benchmark, Western Canada Select (WCS). After hitting record low single digit prices for much of April, WCS prices began recovering in May, spurring a gradual rebound in supplies. We concluded that ~470 Mb/d of oil supply had restarted or was on the verge of restarting by July.

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