While crude oil producers in the prolific Permian Basin are living out a Shale Revolution, the Midcontinent region of the U.S. is having a Refining Renaissance. Crude takeaway constraints, mainly due to insufficient pipeline capacity, are driving the prices of crude in Western Canada and West Texas to attractive lows against the WTI NYMEX benchmark for crude at the Cushing, OK, hub. Cheaper oil can contribute to bigger margins for refiners, who are supplying increasing volumes into a retail market that’s selling gasoline at the highest prices in four years. What will happen if the refiners don’t rein in their runs? Today, we’ll explore the implications of record-high run rates in the U.S. refining industry.
Refiners will push themselves to the limit if they can access cheap crude — and right now Canada’s got a lot of it. As we outlined in What Does It Take?, the Canadian glut is primarily due to capacity constraints, which drive values lower. On the whole, the Canadians’ shipping woes are a long-term problem. There’s ongoing environmentalist backlash against plans to build new pipelines, and railroads are hesitant to work with oil companies unless multi-year contracts are signed. In spite of their reluctance, Canadian crude-by-rail is moving out of the country at the highest rate ever — Canada’s National Energy Board reported a record-high 199 Mb/d of railed crude exports for May.
Weaker Western Canadian Select (WCS) crude prices were temporarily eased by an outage at the 360-Mb/d Syncrude Canada upgrader in northeastern Alberta. The outage, caused by a power failure, started on June 20, and the facility has been gradually returning to normal service since July 24; it is expected to become fully operational in mid-September. The interruption also forced refiners to turn to alternative feedstock options, which has contributed to Cushing stockpiles dropping to nearly four-year lows. Figure 1 shows crude inventory levels in Cushing — also known as the “Pipeline Crossroads of the World” — over the past four years. Total oil storage at Cushing has dropped to the lowest level since October 2014.