Crude-by-rail exports at 3-year high as Canadian discounts rise

CALGARY — Railway exports of crude oil from Western Canada are starting to increase, a welcome sign for producers who were forced to accept bigger price discounts and, in some cases, curtail production, as export pipelines filled to near capacity earlier this year.

Crude-by-rail exports to the United States jumped to a three-year high in March of just over 170,000 barrels per day, the highest since December 2014 and an increase from 134,000 bpd in February, the National Energy Board reported.

Sending oil by rail is generally more expensive than by pipeline, but is considered a vital option to get Canadian oil to U.S. refineries as delays continue to plague planned new export pipelines.

“We do think [rail shipments] will gradually build,” said Kevin Birn, vice-president of the North American crude oil markets for IHS Markit.

“Going into the fall, we expect the pressure to build on the system and you should have a greater uptick in crude-by-rail.”

Market access constraints due to full oil export pipelines have been blamed for volatility in discounts paid for benchmark Western Canadian Select, a blend of oilsands bitumen and lighter oil.

WCS normally sells for $14 to $16 US per barrel less than New York-traded West Texas Intermediate — due to quality differences and transport costs — but that difference in price widened to as much as $30 earlier this year and averaged about $23 US per barrel in March.

The discount has narrowed recently because several big producers, including Suncor Energy, reduced output while performing planned maintenance, Birn said.

Meanwhile, demand fell as refineries in the U.S. and Canada underwent their usual spring maintenance shutdowns to prepare for peak driving season, he added.

Canadian Pacific and Canadian National railways have been slow to devote more resources to picking up oil tankers as they dealt with a backlog of Canadian grain and severe weather that hampered operations this past winter. The railways fear the crude-by-rail business will evaporate as soon as pipelines are built.