Torn between US and China, key trends in TMX flows emerge

Since Dubai Angel loaded the first ever TMX cargo on May 23, Canadian flows from the country’s western coast have managed to generate a lot of industry interest and have slowly started to reshape the heavy flows of Asia Pacific. Three months in operation, flows of Pacific dilbit, Cold Lake blend and other TMX grades have become predictable enough to establish several key trends.

US has become the largest market. When it comes to TMX barrels, in the first full month of loading China has been the dominant buyer. The first loading went to Sinochem in Longkou, however Sinopec and Petrochina became the most prevalent buyers in June, with the country in total accounting for 55% of all outflows. In July, US refiners have already prevailed, ever so slightly with a 52% market share (as China dipped lower to 43%), only to push that metric even higher in August, with US-bound flows representing 60% of this month’s exports at the time of writing. Interestingly, an improving HSFO crack into the summer months and marginally better TMX pricing have effectively pegged the price of landed Canadian barrels to PADD 5 to those of Ecuador’s Oriente. Whilst historically Oriente would trade above TMX, low-TAN dilbit from Canada has been mirroring the pricing moves of the Ecuadorian heavy sour. Looking into the immediate future, the price of Oriente would most probably become the natural ceiling for TMX pricing.

Landed prices for heavy sour grades on a DES Long Beach basis vs WTI, $/bbl.

Source: Kpler calculations based on Argus Media data.

Rongsheng is the largest buyer. Despite the US being the largest market outlet overall, the largest buyer of TMX barrels currently is not American. Partially, this is due to the fact that US West Coast purchasing patterns have been somewhat chaotic. To name but one example, Valero bought four July-loading cargoes of low-TAN dilbit, however its buying appetite into the August schedule has been generally lower. Passing the baton of the largest TMX buyer in the US to P66 or Marathon in August, Valero will most probably pursue an on-and-off policy of purchasing. Surprisingly, the largest buyer of Canadian West Coast volumes currently is China’s private mega refiner Rongsheng, an unlikely candidate considering it doesn’t have any equity in TMX and its massive 480 kbd Saudi Arabian term commitment. Yet it is precisely the ubiquitous sourcing woes of Chinese refiners that have prompted ZPC to buy so many ZPC cargoes – the November-arrival tally of seven Aframaxes (3.8 MMbbls) might remain the highest monthly total of any company for many months ahead. The main reason for this lies in the elevated pricing of heavy barrels and the relative dearth thereof – to break into profits, Rongsheng is looking for any non-sanctioned barrels available and as it happens, TMX grades at a -$6/bbl discount vs ICE Brent M3 happen to be the most-competitively priced (and available) option out there.

Landed prices for TMX barrels compared to regional peers on DES Northeast China basis, $/bbl.

Source: Kpler calculations based on Argus Media data.

Intra-Canadian spreads narrow. For Canadian producers, the fact that TMX has opened up a new universe of heavy sour trading for them was indubitably a great boon. However, the profitability of these trades was oftentimes called into question as shaky quality parameters have effectively fixed TMX differentials around ICE Brent -$6/bbl. If one is to netback China-bound TMX exports to the same Hardisty basis that US-bound pipeline deliveries have bee, the comparison is tilted firmly towards deliveries via the 3 Mbd Mainline system. However, the netback spread between TMX and Mainline has been continuously shrinking – if it stood at $7.9/bbl in June, the first full month of TMX loadings, it has so far averaged $4.85/bbl in August to date. This is a very welcome development for Canadian producers as many could have felt in May-June that the value they are getting from TMX exports is not the same as they would get in the US Gulf Coast. Robust Chinese demand is definitely part of the equation, as landed prices of Cold Lake or Pacific dilbit have been more than $3/bbl cheaper than the Middle East’s heaviest grade, Basrah Heavy in August. For any Chinese refiner that doesn’t want to deal with sanctioned Venezuelan barrels, TMX is the cheapest heavy sour available right now.

Netbacked prices of TMX and USGC-bound barrels on a Hardisty basis vs WTI, $/bbl.

Source: Kpler calculations based on Argus Media data.

Rail strikes force the question of spot tolls. Canada’s rail strikes are a net negative for the Canadian economy; however, they might be a short-term benefit for TMX amidst all the chaos of collective bargaining. The latest published data on Canadian crude-by-rail flows indicates that crude-by-rail volumes are relatively stagnant around 90 kbd. In fact, the June 2024 figure of 89.2 kbd is 15 kbd up y/y, thus far defying the start-up of incremental capacity in the Trans Mountain pipeline system. Should the government-triggered binding arbitration procedures spark the ire of trade unions that remain geared towards a comprehensive deal with CPKC and CN, these 90 kbd could fill up the unutilized roughly 200 kbd spare capacity of TMX. Potentially, they could also feed into the Mainline system, especially considering September volumes were the first ones since August 2023 not to see any apportionment from Enbridge. Against this background, it is regrettable for Trans Mountain Pipeline to only see regulatory hearings on future tolls in May-June 2025. More clarity around the sustainability of the current toll environment and the pricing of the still largely unutilized spot toll could prompt more switching towards TMX. Flexibility will be a key component in Canada’s pipeline strategies, with Enbridge cutting spot tariff rates for USGC-bound deliveries from September 1, specifically for heavy grades (whilst keeping medium and light tolls unchanged).

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