Total Canadian liquids production rose by 0.14 mb/d m/m in January to 4.93 mb/d, higher by 0.25 mb/d y/y. The m/m liquids growth was 60 thousand b/d shy of our forecast, as bitumen output was in-line with expectations but synthetic crude production underperformed following operational issues at the Syncrude Mildred Lake upgrader. Bitumen production of 1.65 mb/d was a record high and up by 0.12 mb/d y/y. Conventional output also continued to recover in January, rising by 15 thousand b/d y/y to 1.31 mb/d as growth at Hibernia (20 thousand b/d y/y) and North Amethyst (10 thousand b/d y/y) offset declines at White Rose (-12 thousand b/d y/y). But the real driver of conventional production growth came from the condensate pool. Indeed, Canadian condensate production was up by over 40 thousand b/d y/y at 87 thousand b/d. Similarly, NGLs output growth surged in January to a record high 0.82 mb/d (higher by 17 thousand b/d y/y) on higher propane production.
Our preliminary forecast for February production based on pipeline receipt data indicates a 57 thousand b/d m/m decline in total liquids output, to 4.87 mb/d, but still higher by 0.26 mb/d y/y. The m/m decline was likely driven by still lower synthetic crude production as Mildred Lake continued to face operational issues, offsetting a 13 thousand b/d m/m hike in output from CNRL’s Horizon upgrader. Issues at Syncrude are likely to extend into May, knocking as much as 25 mb of synthetic supply out of the market between mid-March and end-May. Next, planned work at Shell’s Scotford upgrader, which began last week, will also curtail synthetic production. As a result of the unplanned outages at Mildred Lake and work at Scotford, we have moderated our full-year synthetic crude oil production forecast by around 30 thousand b/d. We now expect 97 thousand b/d of y/y synthetic crude output growth, helping to push total Canadian liquids growth up by 0.21 mb/d in 2017. This near-term tightness in synthetic crude supply has caused knock-on effects to the heavy sour blendpool, pushing WCS-Hardisty prices as high as -$8.70 per barrel as a shortage of synbit pushes buyers to lift more diluted bitumen blends such as WCS and CLK. As a result, even the cheapest committed pipeline arb to Cushing from Canada is now out of the money. However, closed arbs are unlikely to result in a precipitous drop in Canadian exports to the US, as alternative heavy crudes on the Gulf Coast remain tight.
Canadian January demand was revised higher as expected and totaled 2.36 mb/d, higher y/y by 56 thousand b/d, following on from growth of 0.15 mb/d in December 2016. Preliminary data shows a decline in February demand of 90 thousand b/d although this will be corrected as LPG submissions are once again too low. Diesel demand continues to rise strongly, up by nearly 5.5% on average between November 2016 and February