Canadian Crude Oil Market Shows Signs of a Supply Glut

Canadian oil producers are increasingly experiencing wider price discounts for near-term crude, signaling the formation of a potential supply glut. The flagship Canadian crude grade now trades at a discount of over $15 per barrel, a level not seen since January of last year when the Trump administration threatened tariffs on Canadian oil.

The discount for near-term crude is growing faster than for longer-dated contracts, a market structure typically associated with oversupply. This trend contrasts with recent months, when forward-month contracts traded at a premium. The growing discount suggests a buildup of near-term supply, with more crude likely to be stored for future sale.

The Trans Mountain pipeline expansion, completed in May 2024, initially improved export options for Canadian oil and supported higher prices. Alberta producers boosted production to record levels as a result. However, as pipeline capacity fills and competitive options emerge, the benefits are waning.

Why Did This Happen?

The return of Venezuela as an oil exporter has introduced new competition for Canadian crude. Venezuelan crude, a high sulfur, dense crude, is now flowing into the Gulf of Mexico, directly competing with Canadian oil sands crude. This development coincides with growing volumes of inexpensive Russian crude entering the market, further intensifying competition in key export markets like China.

Canadian crude's price disadvantage has also been exacerbated by a shift in Chinese demand. While shipments to China off Trans Mountain fell to their lowest in nearly a year in January, Chinese refiners are now seeking alternatives to the discounted Venezuelan crude they previously received before U.S. military action in Venezuela.

How Did Markets Respond?

Global oil markets are already facing oversupply concerns as output from OPEC and non-OPEC countries has surged. The return of Venezuela as an exporter adds to this pressure. Canadian crude's competitiveness is further challenged by the rising cost of shipping. The arbitrage between crude delivered on the Gulf Coast and crude in Alberta has narrowed to a point that makes shipping less economically attractive.

Enbridge Inc. has begun rationing pipeline space on its Mainline export system, a sign that capacity is tightening. Meanwhile, the price differentials for Canadian crude in Houston reflect this tension, with a premium of $7.70 for two-month-forward contracts compared to one-month contracts.

What Are Analysts Watching Next?

Investors and traders are monitoring whether the current price discount will persist as a sign of a deeper market imbalance. The Canadian oil market is particularly sensitive to geopolitical developments, including U.S.-Iran tensions and potential shifts in U.S. crude production.

The return of Venezuela as a stable oil exporter is one factor, but analysts also point to broader global dynamics. The U.S. dollar's strength and milder weather forecasts have further weakened oil prices, shifting focus back to supply fundamentals.

In the near term, the Trans Mountain pipeline expansion continues to play a role in shaping the Canadian oil market. However, with new pipeline projects under consideration—including the proposed Kitsault Energy project—capacity and pricing dynamics could shift significantly over the next five years.

Market participants are also tracking the use of drag reducing agents (DRA) by Trans Mountain to increase throughput without major infrastructure overhauls. The project, which aims to boost capacity by 10%, is expected to be operational by early 2027.

For now, the combination of rising global supply and shifting demand patterns is creating a challenging environment for Canadian crude producers. The ability to navigate this transition will depend on competitive pricing, access to alternative export markets, and the effectiveness of transportation infrastructure.