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Keystone oil pipeline outage to hit U.S. refiners' supplies, exports

HOUSTON—An outage on the largest oil pipeline to the U.S. from Canada could affect inventories at a key U.S. storage hub and cut crude supplies to two oil refining centers, analysts and traders said.

TC Energy's Keystone pipeline ferries about 600,000-bpd of Canadian crude to the U.S. It was shut late Wednesday after a breach spewed more than 14,000 bbl of oil into a Kansas creek, making it the largest crude spill in the U.S. in nearly a decade.

While TC Energy has yet to say when it could restart the pipeline, a previous Keystone spill affected operations for two weeks.

"The main question continues to be the duration of the potential outage...the longer the duration, ultimately, of course means potentially tighter inventories in Cushing or heavy (crude) on the Gulf Coast," said Michael Tran, a Managing Director at RBC Capital markets.

The line runs directly to the Cushing, Oklahoma storage hub, which is currently about a third full with nearly 24 MMbbl in stock.

If the line is closed for more than a week, it could reduce Cushing stocks by about 2.5 MMbbl, data analytics firm Wood Mackenzie said.

If the outage last for more than 10 d, it could push Cushing storage to near the operational minimum of 20 MMbbl, said AJ O'Donnell, a Director at pipeline researcher East Daley Capital.

Other pipelines between Canada and the U.S. are at or near capacity, East Daley and Wood Mackenzie estimate.

"There's nowhere near enough to take 600,000 bpd. There's just not enough pipe right now," O'Donnell said. Refineries in the U.S. Midwest may be more affected depending on when the line is restarted.

The spill in Kansas took place downstream from a key junction in Steele City, Nebraska, where Keystone splits to run into Illinois. That stretch of the line could be restarted, but the other segment affected by the spill will not come back until regulators approve a restart.

By contrast, Gulf Coast refiners can draw on more sources for crude, both from offshore Louisiana facilities and from countries like Colombia, Mexico and Ecuador.

Still, volumes to the Gulf from Cushing have already dropped. Volumes on TC Energy's Marketlink pipeline, which flows from Cushing to Nederland, Texas, fell by about 300,000 bpd to less than 500,000 bpd, Wood Mackenzie estimates, after the leak was discovered.

That could leave the Gulf Coast refineries short of heavy Canadian barrels.

U.S. physical crude oil grade prices were mixed on Thursday and O'Donnell at East Daley Capital said he expects volatility to continue as long as Keystone remained offline.

Meanwhile, a lengthy shutdown of the pipeline could lead to Canadian crude getting bottlenecked in Alberta, and drive prices lower, although the market's reaction on Friday was muted.

Western Canada Select (WCS), the benchmark Canadian heavy grade, for December delivery last traded at a discount of $27.70/bbl to the U.S crude futures benchmark, according to a Calgary-based broker. On Thursday, December WCS traded as low as $33.50/bbl under U.S. crude, before settling at around a $28.45/bbl discount.

"I am shocked by the size of the spill and I'm shocked at the lack of market price reaction," said Paul Sankey, an analyst at independent research firm Sankey Research.

(Reporting by Arathy Somasekhar in Houston, Laura Sanicola in Washington, Nia Williams in Calgary and Shariq Khan in Bengaluru; Editing by Marguerita Choy)


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