Defending Market Share
Unprecedented demand destruction has upended the oil market. As a result, oil production has been shut-in across Canada and the rest of the globe. What is the likelihood of Canada losing global oil market share as economies start to reopen?
The U.S. remains by far the largest export market for Canadian oil. Canadian oil production, dominated by heavy crude grades, is the feedstock of choice at many U.S. refineries. These refineries are configured to process heavy crude oil and have a consistent economic incentive to process these grades. Recent history illustrates this dynamic. The flow of heavy Canadian crude has not been displaced by growing light oil production from U.S. shale basins. These same incentives will persist as economic activity resumes, oil demand recovers, and refinery utilization rates ramp back up.
Growing Production Despite Headwinds
Oil production in Canada has grown considerably in recent years, exceeding pipeline takeaway capacity in western provinces. This contrasts with tepid growth in many other jurisdictions, including OPEC member countries. Canadian heavy oil production has steadily increased, driven by the export of growing volumes to refineries in the U.S. This has occurred despite lower total U.S. imported volumes.
The Right Quality
The U.S currently produces an abundance of light oil that needs to be blended with heavy imported crudes to meet refinery feedstock specifications. The continued consumption of Canadian heavy oil will maximize crack spreads and profits for refiners. Economics will drive demand for Canadian oil. This will remain true as the coronavirus pandemic runs its course.
Competition in delivering heavy oil grades to the U.S. will remain low, with both Venezuela volumes blocked by sanctions and gradually declining production from Mexico. These two countries have historically acted as other significant sources of heavy crude imports to the U.S.
Better Links to Global Markets
The transition of the U.S. to a net exporter of total petroleum liquids has occurred with increasing exports of light crude oil and refined petroleum products. U.S. petroleum product exports include products derived partly from Canadian crude oil and sent to markets worldwide. The U.S. remains the largest export market for Canadian crude, while increasingly becoming linked to world markets through growing trade flows.
Data Source: U.S. Energy Information Administration
Additional pipeline capacity is under construction and will further improve the outlook for Canadian oil. These developments will strengthen market access and reduce transportation costs. Canadian oil is well positioned to maintain global market share during the pandemic and could be in a position to capture additional market share in the future.
Although prices will remain challenged, Canadian crude exports will flow as oil demand recovers. Canadian oil producers should keep a close eye on U.S. reopening plans for signs of a normalizing market.
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