Market Snapshot: Rail remains important for transporting western Canadian crude oil

Release date: 2019-12-04

Price differentials between western Canadian heavy oil (Western Canada Select or WCS) and United States (U.S.) oil (West Texas Intermediate or WTI) tend to move together with crude-by-rail exports (Figure 1). Since western Canadian oil producers are price takers, they must offer their oil at prices that are competitive in destination markets like Cushing, Oklahoma and the U.S. Gulf Coast. This requires exporters from Canada to pay the cost of transportation to those markets. Since transporting crude by rail is more expensive relative to pipelines, differentials must be wider to justify the use of rail and cover its higher cost.

This relationship began to change in early 2019, when the Government of Alberta imposed production limits on some oil producers in the province. Since then, the WCS-WTI differential has remained narrow, yet crude-by-rail exports have significantly increased.

Figure 1. Crude Oil Exported by Rail and WCS-WTI Price Differential

Over the last couple of years, companies began signing longer-term contracts with rail carriers, which lowered rail’s transportation costs^Footnote 1. With increased experience, rail operators became more efficient at shipping oil, which means other costs fell and shipping times for Canadian oil to reach U.S. markets decreased.

The Government of Alberta has steadily relaxed production limits since announcing them and additional production must be exported in another way while western Canadian oil-export pipelines remain full. The Government of Alberta also recently announced that crude oil production limits will be eased for producers who commit to move additional production by rail. This change takes effect starting December 2019.^Footnote 2 These limits are being continually monitored by the Government of Alberta and are subject to change; the latest information can be found on their website.

Rail is more expensive than transportation by pipelines but has some advantages. Rail can bypass regions with insufficient pipeline capacity or bottlenecks like in western Canada and at key locations in Texas and Oklahoma. This allows some crude to reach higher priced markets like the U.S. Gulf Coast where Canadian heavy oil is in high demand because of declining imports from Venezuela and Mexico.

Date modified:

2023-11-28