What Venezuela's return means for Canadian midstream

Venezuela’s return as a major crude supplier to the U.S. is reshaping the market for heavy crude. Venezuelan barrels have overtaken Canadian crude in Gulf Coast imports and, along with record freight costs, have pushed Canada’s heavy crude discount to more than double its 2025 levels. In response, Canada is accelerating its push into Asian markets. For midstream, long-term contracts and steady flows to the U.S. Midwest have limited the impact, while rising Canadian production continues to support new pipeline capacity.

Key takeaways

Venezuelan crude has overtaken Canadian crude in U.S. Gulf Coast imports. Barrels that once went to China are now heading to U.S. refiners.
The price discount in Canadian heavy crude relative to U.S. oil has more than doubled from 2025 levels. More competition and record shipping costs are the main drivers.
Canada is shipping more crude to Asia. Long-term contracts have largely protected Canadian pipeline companies. Customers are still signing up for new pipeline capacity.

Venezuela’s return intensifies competition for heavy barrels

Since the U.S. captured Nicolas Maduro in January, Venezuela has steadily rebuilt its oil output and deepened its energy ties with Washington. Venezuelan production was estimated at 1.15 million barrels per day (MMBpd) in September, up about 19% from a year earlier. Under a 25-year agreement with the U.S. signed in August, Venezuela aims to lift output from 17 strategic fields to more than 1.5 MMBpd, up from about 0.2 MMBpd today.

Increasingly, those barrels are headed to the U.S. Gulf Coast. Last year, roughly three-quarters of Venezuela’s oil exports went to China. Since the U.S. lifted its naval blockade and eased sanctions, much of that supply has been redirected to the U.S. Gulf Coast, where refineries are configured to process heavy, sour crude. Valero (VLO) recently noted that Venezuelan crude competed “very favorably” against other heavy sour options in the third quarter, helping it set a record for Venezuelan runs. Similarly, Phillips 66 (PSX) said in August it had become the third-largest buyer of Venezuelan crude worldwide, and Marathon (MPC) more than doubled its Venezuelan runs in the second quarter.

Venezuela is reclaiming a role it once held. As recently as 2017, Venezuela was the Gulf Coast’s largest source of imported crude, before U.S. sanctions cut off those flows. Canada had since taken the top spot, leading Mexico in both 2024 and 2025. Now Venezuelan barrels are filling gaps left by other traditional suppliers. Mexico is keeping more of its heavy crude for its new Olmeca refinery, and after the Strait of Hormuz closed, Gulf Coast imports from Saudi Arabia fell from about 300 thousand barrels per day (MBpd) in the first quarter to zero by July. As shown below, Venezuelan imports to the Gulf Coast surpassed Canadian imports in April, and by July they were nearly double.

Canadian heavy crude discounts widen

The added competition from Venezuela has cut into Canada’s crude flows to the region. Canada’s Gulf Coast exports have averaged about 340 MBpd so far this year, down from about 415 MBpd in 2025. Canadian barrels haven’t been pushed out, though. MPC noted that “eight out of 10 times,” heavy Canadian crude beats Venezuelan barrels on economics at its Gulf Coast refineries. Still, the added supply has weighed on prices. Western Canadian Select (WCS), which typically trades below West Texas Intermediate (WTI) because of its lower quality (heavier) and distance from major refining hubs, has seen its discount widen sharply this year.

Venezuela isn’t the only factor. The war with Iran has also impacted heavy crude markets through rising freight costs. Record tanker rates have made it costly to re-export Canadian heavy crude from the Gulf Coast. VLO noted that shipping crude from the Gulf Coast to Asia on a very large crude carrier now costs around $30-35 per barrel (bbl), versus about $5/bbl last year, forcing sellers to “discount barrels to account for the freight.”

Still, the wide discount is drawing buyers back. VLO said Canadian crude became “much more competitive” against Latin American barrels recently, and HF Sinclair (DINO) expects differentials to moderate but stay wider than usual “at least through 2027.”

Canada accelerates its pivot west

The U.S. still takes almost 90% of Canada’s crude exports, with roughly 70% bound for the Midwest and only about 10% headed for the Gulf Coast. Canada has been seeking to diversify its crude trade in recent years. Its government-owned Trans Mountain pipeline has helped to connect different crudes and refined products from Alberta with Canada’s western coast, where most export cargoes head to Asia. The system’s capacity was increased from 300 MBpd to 890 MBpd in May 2024. Since then, Canadian exports to non-U.S. markets have roughly doubled, from 268 MBpd in June 2024 to 554 MBpd in July 2026.

Venezuela’s return as a crude supplier to the U.S. has reinforced that shift. As Venezuelan barrels moved to the U.S., Chinese refiners that relied on them have turned to Canadian heavy crude, which can reach Asia in about two weeks. Middle Eastern supply constraints have further added to Asian demand for heavy crude. The Trans Mountain pipeline hit full capacity for the first time in June, and it plans to add 90 MBpd of capacity in the fourth quarter, followed by another 210 MBpd by the end of 2028. Trans Mountain expects most of that added volume will head to Asia.

In recent months, Canada has moved to fast-track the proposed 1-MMBpd Pacific Link crude pipeline, which would connect Alberta to the British Columbia Coast. As the second west coast line, Pacific Link would be built by Trans Mountain in coordination with Pembina (PPL CN) and is and could begin operating between 2032 and 2034.

What it means for midstream

Venezuela’s return has little direct impact on U.S. midstream, though Canadian midstream names briefly sold off in January on competition fears. Midstream companies largely earn fees under long-term contracts, so Canadian producers have borne the brunt of the wider differential. Pipeline volumes have also held up in the Midwest, where most Canadian crude arrives.

The bigger question is the pace of new egress. Canada’s crude export pipelines remain highly utilized, and Trans Mountain is already running at capacity. DINO noted that Canadian production is “outpacing egress.” Enbridge’s (ENB CN) Mainline from Edmonton, Canada’s largest crude export system, is set to add 150 MBpd starting in 2027, along with 100 MBpd on Flanagan South, which carries crude from Illinois to Cushing, Oklahoma, for delivery to Houston on the Seaway pipeline. The expansion is backed by take-or-pay contracts for the full route. In July, though, ENB postponed a 250-MBpd second phase, citing a lack of producer commitments amid policy uncertainty.

Still, producers are willing to commit to new capacity, even toward the Gulf Coast. South Bow’s (SOBO CN) Keystone system is supported mostly by long-term contracts, and its Gulf Coast segment set throughput records in the second quarter. In August, nine shippers signed binding 20-year commitments for 465 MBpd on SOBO’s proposed Prairie Connector, which would carry more Canadian crude to the U.S. border with further connectivity to the Gulf Coast.

Bottom line

The return of Venezuela’s crude to the U.S. and soaring freight costs have more than doubled Canada’s heavy crude discount from 2025 levels, weighing mainly on Canadian producers. For midstream, long-term contracts and steady Midwest flows have limited the impact, while rising Canadian production supports new egress both west for export to Asia and south to the Gulf Coast.

This article was originally published on ETFDb.

What Venezuela's return means for Canadian midstream

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Kyle Richards, CFA

Key takeaways

Venezuelan crude has overtaken Canadian crude in U.S. Gulf Coast imports. Barrels that once went to China are now heading to U.S. refiners.
The price discount in Canadian heavy crude relative to U.S. oil has more than doubled from 2025 levels. More competition and record shipping costs are the main drivers.
Canada is shipping more crude to Asia. Long-term contracts have largely protected Canadian pipeline companies. Customers are still signing up for new pipeline capacity.

Key takeaways

Venezuela’s return intensifies competition for heavy barrels

What Venezuela's return means for Canadian midstream

Key takeaways

Venezuela’s return intensifies competition for heavy barrels

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