US refiners seek alternatives to Canada oil sands crude
NEW
YORK/HOUSTON (Reuters) - US Midwest refiners are rushing to secure alternatives
for crude supply as they worry about prolonged outages after a raging wildfire
in Canada shut nearly half of production capacity from the vast oil sands.
Even with
some 1 MMbpd in Canadian production capacity still offline due to the massive
wildfire, sufficient US supply is no problem, traders said. They pointed to
record crude stocks at the US hub of Cushing, Oklahoma, swelling domestic
supplies, as well as growing imports from Latin America, West Africa and the
Middle East.
Still, they
said, refiners with a large appetite for Canadian crude may have trouble
getting alternative supplies fast enough. Those facilities may include BP PLC's
Whiting, Indiana refinery and Phillips 66's Wood River, Illinois refinery.
For now, they will pull crude from their own storage tanks or get it from Cushing or the Gulf, reversing trade flows that have prevailed during the US shale boom, traders and analysts said.
But some
refiners without accessible crude supply and with tighter margins may have to
cut refinery runs, analysts said. This could exacerbate the swollen US crude
glut and add more pressure to oil prices.
While US
refinery margins saw a big spike on Wednesday, they are below their five-year
average for this time of year, Reuters Eikon data showed.
Logistical lag time and alternative
sources. Refiners in
the eastern part of the US Midwest, still reeling from the unplanned Keystone
pipeline outage last month, will be left without Canadian supply, said Dominic
Haywood, an analyst at Energy Aspects in London.
"They
will likely rely on inventory in the first instance, but for some plants this
will not be sufficient to sustain runs if inflows from Canada remain
subdued," he said, adding that the long transit time from other market
hubs and softer margins could mean "unavoidable" run cuts.
The rush to supply crude to the Midwest was apparent this week on news that volumes will more than double in May on the largest US pipeline, the 1.2-MMbpd Capline running from the US Gulf to the Midwest. Yet even that increase still represents only half its nameplate capacity.
Traders noted
that other pipelines providing crude to the Midwest, including Enbridge's Ozark
and BP1 pipelines, still have additional capacity.
Analysts
predicted that the logistical lag time will result in some backlogs for
refiners already starved from their typical Canadian diet for more than a week.
This includes
Husky's Lima refinery, which was wrapping up a major eight-week turnaround at
the end of April as it tries to process more heavy crude feedstock.
US imports of
Canadian crude rose to 2.95 MMbpd last Friday. Production cuts due to the fire
should put a big dent in that this week.
Traders said
other imports, though plentiful, will need time to move to the Midwest. US
imports of West African crude are expected to rise in May to the highest since
October 2013. Iraqi imports should hit the most since at least the start of
2015, according to Eikon data.
Latin
American crude, which would be a natural replacement for Canadian oil due to
quality, has also had some setbacks as several outages have forced countries, including
Brazil and Venezuela, to reduce exports. US imports of Latin American crude are
expected to grow 3.3% in May from April.
Despite the
regional constraints, the futures and cash markets have largely shrugged off
the fire. In the cash market, Light Louisiana Sweet and Mars Sour, the US Gulf
Coast light and sour benchmarks, respectively, moved little this week as a glut
in the US Gulf Coast grows, where some spots show delays of up to two weeks in
offloading crude.
(Reporting by Catherine Ngai, Marianna
Parraga and Jarrett Renshaw; Editing by David Gregorio)
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