Increased supply and additional takeaway capacity has tapered the price spread between heavy Canadian crudes and the diluent used to transport them to its narrowest level in four years.
The premium for condensate's price differential to Western Canadian Select was $10.30/b Tuesday, the narrowest it has been since June 8, 2010 when it was $10.20/b.
WCS was assessed Tuesday at WTI CMA minus $12.55, a $9.45/b increase since the start of the year and its highest value since being assessed at WTI CMA minus $11.95/b on July 2, 2013.
Support for heavy crude differentials has mostly stemmed from the anticipated November start of Enbridge's 600,000 b/d Flanagan South pipeline, which will carry heavy crudes from Pontiac, Illinois, to Cushing, Oklahoma.
"Flanagan demand is helping boost heavy value," one trader said.
Weekly stocks in the US Midwest reached 91.602 million barrels the week ending October 10, their highest level since the week ending May 9, according to the most recent US Energy Information Administration data. But the cash market for condensate has fallen steadily since the beginning of the year, only rising for several weeks in late-August on unusually high demand in the US Midwest.
Condensate was assessed Tuesday at the calendar-month average of NYMEX light sweet crude (WTI CMA) minus $2.20/b, a $7.20/b fall from the beginning of the year. The price for the diluent started to plunge in May when Kinder Morgan started its 95,000 b/d Cochin pipeline, which transports condensates from Illinois to Alberta.
Several other projects will soon introduce even more condensate supply to the Canadian market.
TransCanada received regulatory approval last week to start construction on its Grand Rapids pipeline, which runs from Fort McMurray, Alberta to Edmonton. The line will have a total throughput of 900,000 b/d, including 330,000 b/d of diluent capacity.
Additionally, Enbridge is currently working to expand its Southern Lights diluent pipeline to 275,000 b/d from 180,000 b/d. The line runs from Illinois to Alberta.
Available diluent supply to the Edmonton area -- the largest terminal hub for Canadian crude -- is compounded further by Canada's own condensate production growth.
Condensate production in Western Canada was 144,000 b/d in 2013 and will grow to 160,000 million b/d by 2030, peaking in 2025-26 at 172,000 b/d, according to the Canadian Association of Petroleum Producers. That figure "is in contrast to the 2013 report, where condensate production was forecast to decline steadily," CAPP said in its 2014 report.
"Increased drilling in liquids-rich natural gas plays such as the Montney and emerging plays like the Duvernay has reversed the declining trend in condensate production, which was previously forecast to fall 94,000 b/d by 2030," CAPP said. "In this latest forecast, condensate production accounts for almost 170,000 b/d, on average, for the forecast period."
Despite the increase in domestic production, Canada still imported 5.874 million barrels of condensates from the US in July, the highest total so far this year, according to the EIA.
This influx of supply -- and subsequent lower prices -- could see an increase in interest as production of bitumen increases, a second trader said.
"As production from the oil sands grows so will condensate demand," he said. "It just depends on how fast the growth will come."
CAPP expects heavy crude production in Western Canada "to grow from 2.0 million b/d in 2013 to 3.6 million b/d in 2020 to almost triple the current volume in 2030 when it reaches 5.7 million b/d."
