A well supplied heavy crude market in the US Gulf coast could flip to a shortage later in 2024 as the expected start-up of major downstream operations in Canada and Mexico pull supplies away from the region, leaving refiners to seek alternative grades from Latin America.
The 590,000 b/d Trans Mountain Expansion (TMX) pipeline in Canada is expected to begin commercial service as early as the second quarter, although the project could be delayed up to two years after regulators rejected a request for changes to a section of the project.
Producers expect roughly 4.5mn bl of TMX linefill injections to start in 2024, which will draw supplies from production in Canada's oil sands to the ports of Burnaby, British Columbia, on the Pacific coast. Those supplies sent west would typically go to customers in the US midcontinent and Gulf coast. Canadian heavy crude deliveries to the US Gulf coast averaged 273,000 b/d in January-September 2023, according to the US Energy Information Administration (EIA).
Heavy crude supplies from Mexico also look to tighten with the start-up of the long-delayed 340,000 b/d Olmeca refinery as part of the Mexican government's ambitious goal of making Mexico self-sufficient in gasoline and diesel.
The Olmeca refinery — which Pemex said would be producing 290,000 b/d of gasoline by the end of the year — would likely lead to Mexico reducing heavy sour Maya crude exports, leaving a supply gap that other crudes from Latin America could fill at the US Gulf coast. Market participants, however, say Olmeca is more likely to be fully operational toward the end of 2024.
Sour crude supply alternatives
Venezuelan crude was a growing source of US heavy supply in 2023 that could help mitigate anticipated declines from Mexico and Canada.
Venezuelan crude returned to US Gulf coast refineries in January 2023 following a three-year hiatus, as the US partially eased sanctions on the South American country in November 2022. US imports from Venezuela more than tripled to 146,000 b/d in September from 40,000 b/d in January, according to the latest EIA data.
The volume of crude from Venezuela will likely increase further after the US temporarily lifted more sanctions on the Venezuelan oil sector on 18 October. But uncertainty still lingers, as the US could reimpose sanctions if Venezuelan president Nicolas Maduro's government fails to make good on its pledge to hold a free election next year and to release hundreds of political prisoners.
The sanctions waiver is expected to last until 18 April and could be extended if the Venezuelan government upholds its end of the deal.
Still, the extra supplies in the market in 2023 — combined with continued heavy crude shipments from Canada's oil sands and deliveries of Mexican heavy sour Maya — are likely to leave the Gulf coast market well supplied next year.
The Argus Western Canadian Select (WCS) Houston assessment for the January 2024 trade month averaged around a $7.70/bl discount to WTI crude futures, compared with a yearly average discount of roughly $7.45/bl in 2023.
The prospect of more heavy crude supply from Venezuela in the market also has weighed on Colombian crude, with heavy sour Castilla Blend falling to a seven-month low at a $10.40/bl discount in mid-November.
Castilla crude values have been slow to recover but could draw support next year from US Gulf coast buyers seeking substitute grades. Higher-gravity crudes like Castilla and Colombian medium sour Vasconia often make their way to the US Gulf coast. An average of 147,000 b/d of Colombian crude, which could be comprised of other Colombian sours, arrived in January-September 2023, according to EIA data.
By Giovann Rosales and Scott Phillips
https://www.argusmedia.com/en//news/2522477-viewpoint-usgc-poised-for-heavy-crude-supply-shortage?backToResults=true
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