Crude supply moving into the U.S. was limited for the week ending November 24, as TransCanada's 590,000 bpd Keystone pipeline was shut on November 16 due to a leak in South Dakota. The pipeline transports barrels from Hardisty, AB, to Steele City, NE, and then onward to either Cushing, OK, or Patoka, IL.
Genscape reported that the pipeline restarted on November 29, suggesting that impacts of the outage will persist into the week ending December 1. TransCanada received approval on their restart plans from the Pipeline and Hazardous Materials Safety Administration (PHMSA), and planned to begin operating Keystone at reduced rates on November 28, according to a November 27 press release.
This is not the first leak that Keystone has experienced; on April 2, 2016, the pipeline experienced a leak that spilled nearly 400 bbls in southern South Dakota, during which the system was shut for just over eight days. It restarted on April 10, one day after the company was granted conditional approval by PHMSA to resume Keystone flows.
Prior to the recent leak, Keystone had been operating above nameplate capacity, with flows averaging above 600,000 bpd since Hurricane Harvey. Based on recent volumes, the outage potentially hindered nearly 8mn bbls of crude from entering the U.S. during the 13 days it was shut. The disruption had widespread impacts across the North American crude supply chain, although crude stockpiles in the U.S. Mid-Continent absorbed a good portion of the blow.
U.S. Mid-Continent crude stockpiles feed downstream markets
Crude stocks at the Cushing storage hub fell 2.98mn bbls during the week ending November 24, according to Genscape’s November 27 report. The Energy Information Administration also reported a comparable 2.914mn-bbl draw at the hub in a November 29 report. Cushing inventories took the largest hit from the Keystone outage, as it hampered supply to the hub. Prior to the leak, Keystone flows to Cushing had averaged 347,000 bpd since Hurricane Harvey, accounting for about 57 percent of total flows on the line.
The decrease was the largest week-over-week draw since September 2009, continuing a recent destocking trend. Cushing inventories have fallen 6.6mn bbls (to 59.9mn bbls) between the weeks ending November 3 and November 24.
The impact on downstream markets has been relatively low, as market participants have tapped into storage stockpiles to maintain supply to refineries. Despite the decrease in supply from Canada, pipeline flows out of Cushing increased last week, as Cushing stockpiles cushioned refiners from the blow of the disruption. Flows from Cushing to the Midwest increased 9,000 bpd to 519,000 bpd, with no pipelines posting weekly changes greater than 20,000 bpd.
Phillips 66 did cut run rates at their 336,000 bpd Wood River, IL, refinery due to the Keystone outage, however, according to a November 21 Energy News Today (ENT) report. Genscape data showed that the 64,000 bpd crude distillation unit at the refinery was shut November 18 after recently being offline November 14-16. The company plans to shut the largest crude unit at the refinery in early December for maintenance, according to the ENT report.
Meanwhile, flows from Cushing to the U.S. Gulf Coast climbed 39,000 bpd 1.354mn bpd for the week ending November 24. The uptick was driven by a 28,000 bpd increase on TransCanada's Gulf Coast (also known as Marketlink) pipeline, which is heavily supplied by Keystone.
The increase supports TransCanada's claim that the downstream pipeline would not suffer from the Keystone disruption. "[The leak] does not affect the Marketlink pipeline system, which uses the facilities of the southern leg of the Keystone system from Cushing to the Gulf Coast," the company said in a November 16 news release.
In addition to the substantial draw at Cushing, decreased pipeline flows from Canada to the U.S. also led to decreased stocks at the Patoka storage hub. Inventories there decreased 568,000 bbls to 7.803mn bbls last week. Since Harvey, approximately 43 percent of Keystone flows were directed toward Patoka.
The significant decrease in Canadian imports and subsequent U.S. storage draws put upward pressure on domestic crude prices. The NYMEX Light Sweet Crude (WTI) front month contract rose $3.81/bbl to $58.95/bbl from November 16-24. The front-to-second month contract spread switched into a backwardation structure on November 21 for the first time in three years.
Crude barrels back into storage in Western Canada
The Keystone outage led to a 420,000 bpd decrease in flows from Canada to the U.S. for the week ending November 24 on monitored pipelines, dipping to the lowest weekly average since September 2016. Flows on the other three monitored cross-border pipelines were relatively flat last week, with Enbridge's Mainline pipeline decreasing less than 1,000 bpd. Barrels backed into storage in Canada as takeaway capacity to the U.S. was hindered by the Keystone pipeline disruption.
Crude and diluent inventories at monitored locations in Western Canada increased 2.657mn bbls to 27.515mn bbls for the week ending November 24. The storage build was the largest since Hurricane Harvey and brought stocks to their highest levels since March.
The largest storage build in the region took place at Hardisty, the origin point of the Keystone pipeline. Inventories there jumped 1.881mn bbls to 13.724mn bbls, driven by an 852,000-bbl build at the TransCanada terminal. Hardisty stocks also climbed to their highest level since March, and may post another increase for the week ending December 1.
The pipeline shutdown and subsequent storage impacts led to a wide discrepancy between U.S. and Canadian benchmark crude prices. Western Canadian Select was assessed at the widest discount in over two years on November 27, tumbling $2/bbl from the previous week, to WTI CMA minus $17.65/bbl.
Rail transportation was also affected by the pipeline outage. The average weekly rail loading volumes at the three monitored terminals in Alberta jumped to over 100,000 bpd for the first time since late-March in the week ending November 24. The increase was due to the shuttering of the Keystone pipeline and higher apportionment from Enbridge, sources said. Loadings rose 31,000 bpd to 110,000 bpd for week ending November 24, the most since week ending March 17, putting the two-week gain at 61,000 bpd from the two-month low of 50,000 bpd.
West Texas pipelines partially cover for lost Canadian supply
Pipeline flows out of West Texas increased 37,000 bpd to 1.023mn bpd for week ending November 24. Flows on the 450,000 bpd Wichita Falls, TX,-to-Oklahoma segment of Plains All American's Basin pipeline increased 33,000 bpd to 371,000 bpd, the highest weekly average since March 2015. Volumes from West Texas to Oklahoma likely increased to help supplant the decreased supply from Canada.
Flows also increased last year, when the Keystone pipeline was shut for eight days following a leak on April 2. Movements from West Texas to the Midwest increased 130,000 bpd to 393,000 bpd for week ending April 8, 2016, again driven by increased flows on Basin.
Meanwhile, inventories in West Texas fell 1.762mn bbls to 15.164mn bbls. Stocks have decreased 2.058mn bbls across the past two weeks, receding from the highest level since week ending April 7. The draw was driven by lower stocks in Midland, TX, which declined 1.157mn bbls to 4.785mn bbls. Midland inventories have decreased 1.762mn bbls since week ending November 3, when inventories were the highest since March. Stocks also fell 532,000 bbls at Wichita Falls last week, due to higher flows to Oklahoma.
Midwest gasoline prices fall despite regional run cuts, but prices rise elsewhere
Gasoline futures prices reacted to the Keystone pipeline outage this month, with the front-month NYMEX RBOB contract rising $0.06/gal from November 16 to November 28, nearly in line with the jump in crude oil futures. But the impact of the futures price rise on local spot markets, especially those near refineries impacted by the Keystone outage, was varied.
Houston rack prices rose $0.07/gal over that period to $1.73/gal for regular gasoline on November 28, according to Genscape’s Supply Side data. However, the end of seasonal refinery maintenance and additional supplies off the 660,000 bpd Explorer Pipeline mitigated the price impact in Tulsa, OK, and Chicago, where local spot markets in those two cities typically lead price direction in nearby rack cities, according to a November 20 Reuters article.
Regular gasoline prices in Chicago spiked earlier in the month to $2.15/gal on November 2, and have steadily declined since then as the supply tightness has abated. Over the Keystone outage period, regular gasoline rack prices fell nearly $0.09/gal to $1.68/gal on November 28. Tulsa rack prices for regular gasoline were relatively stable over the outage period, between $1.73-$1.76/gal, despite lower flow from Keystone to Cushing. Spot differentials in the Tulsa-based Group 3 market appear to have declined in the face of a rising RBOB futures pricing basis.
The Keystone outage did prompt a sharp decline in week-on-week gasoline rack activity in Hartford/Wood River, IL on November 18, when Phillips 66 cut rates at its 336,000 bpd Wood River refinery. According to Genscape’s Supply Side data, total gasoline rack activity for Hartford/Wood River was just 28,513 barrels November 18, almost 30 percent below levels seen the previous week and counter to the strength in rack activity seen across PADD 2 amid Thanksgiving travel.
Rack activity at Hartford/Wood River recovered prior to the Thanksgiving holiday on November 23. The run cuts also allowed regular gasoline rack prices there to buck the recent downward trend seen in the Midwest spot market hubs, rising $0.03/gal on November 18 to $1.81/gal. As local run cuts abated, regular gasoline prices continued their downward trend in line with bearish regional fundamentals for the Tulsa and Chicago hubs.
Overview
The Keystone pipeline is a pivotal source of Canadian crude barrels for U.S. markets, so outages on the line can send ripples through the entire North American supply chain.
Although this was the case for the disruption caused by the November 16 spill, the impacts were primarily felt in Western Canada and the U.S. Mid-Continent. Stockpiles at the Cushing and Patoka hubs kept barrels flowing to downstream markets, cushioning the blow for refiners in the Mid-Continent and U.S. Gulf Coast markets. The outage also caused crude price reactions in the U.S. and Canada, which contributed to higher gas prices at the pump for some consumers.
The pipeline resumed on November 29. Flow rates will likely ramp up through the rest of the week. Fortunately, the ramifications of the outage were not show-stopping for the North American crude distribution network. But a lengthier outage certainly could have had had further reaching effects, potentially disrupting refining activity in the U.S. Mid-Continent and Gulf Coast. The Keystone spill serves as a sobering reminder of the potential impact of supply disruptions, even from a single pipeline.
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