The relationship between different types of crude oil is a complex one. Amongst the innumerable factors that impact price differentials are the quality and quantity of imported grades. The chart above shows the average monthly volumes of Canadian and Mexican crude oil purchased by U.S. refiners and it does not exhibit any discernible pattern apart from perhaps seasonality. This, however, might be changing due to infrastructure projects in the northern and southern neighbors of the U.S.

To begin with Canada, the expansion of the Trans Mountain pipeline is to have a noticeable impact of crude oil economics in the salient U.S. Gulf Coast region. The $25 billion expansion became operational in May this year and has increased shipping capacity to the Canadian Pacific Coast threefold, to 890,000 bpd. The new pipeline project entails reduced flow of sour crude to the USGC. Whilst re-directed Canadian oil flows might not show up tangibly in U.S. crude oil imports from Canada as a high proportion of this volume will end up in the U.S. West Coast, which is separated from the rest of the country by the Rocky Mountains, USGC refiners will be forced to seek an alternative source of supply of sour crude.

And this supplier will not be Mexico. The 340,000 bpd Dos Bocas refinery, aka Olmeca, is also in the process of starting up. Its declared goal is to reduce Mexico’s dependence on U.S. gasoline shipments by refining domestic crude oil. When it becomes fully operational, and it is not entirely clear when that will happen, but current estimates put it around the first quarter of next year, it will have a pronounced impact on flows to both directions. There was a round 730,000 bpd of Mexican crude oil finding its way into the U.S. Gulf Coast last year while around 500,000 bpd of gasoline travelled from the U.S. to Mexico.

The effect of the Dos Bocas refinery on gasoline cracks will plausibly be negative as USGC refiners will be, potentially structurally, shorter on crude and longer on the motor fuel than they are now. However, when combined with the reduced availability of Canadian sour crude into the main refining region of the U.S. their influence on the price differential between sweet and sour crude, or WTI and WTS, might be even more intense. The WTS (Argus) futures contract traded at CME Group has priced at a discount of 22 cents/bbl to CME Group flagship WTI contract 2019-to-date. When the collective impact of the Canadian pipeline expansion and the new Mexican oil refinery is fully felt this differential could narrow considerably.