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NEW YORK Oil traders scrambling to secure crude in the U.S. Midwest have pushed North Dakota's Bakken to a near premium for the first time in two years, a rally stoked by record refinery runs and an unprecedented slump in Canadian imports.
Yet some traders say the surprising strength emerging from opaque physical crude markets in the heartland of the fracking boom also points to a more important, lasting factor: declining production of Bakken crude, a long-anticipated but as yet unproven twist in the shale revolution.
The buying frenzy pushed Bakken delivered at Clearbrook, Minnesota WTC-BAK, to trade just 35 cents a barrel below the West Texas Intermediate benchmark last week, dealers say, the narrowest discount since July 2013. On Tuesday, it widened slightly to a 75-cent discount. Four months ago, it traded at a $7.50 discount.
"The rapid spread contraction may be indicative of a faster-than-anticipated production decline, presenting upside risk to our price forecast" in the second half, Barclays analysts wrote in a report.
There are other compelling reasons for Bakken crude's relative strength, to be sure.
Canada's oil exports to the United States suffered their biggest monthly decline on record this spring due to maintenance on big oil sands projects as well as forest fires that slashed a tenth of Alberta's total oil production.
Refiners in the U.S. Midwest region ran the most crude ever for the month of May thanks to a light maintenance slate and robust margins, triggering a bidding war for light barrels.
Regardless, the disappearing discount offers a partial reprieve for large producers like Continental Resources (CLR.N) and Hess Corp (HES.N) after the past year slashed global oil prices by as much as 60 percent to six-year lows.
Thanks to the stronger differentials, Bakken crude BAK- has risen 54 percent from its mid-March low, whereas U.S. WTI prices CLc1 are up only 37 percent, according to Reuters data.
Oil drilling rigs are down 58 percent this year in North Dakota, setting the stage for a reversal after years of breakneck production growth. The timing and scale of that descent have been unclear due to lagging official data.
North Dakota's Department of Mineral Resources will release figures for April production on Friday. The No. 2 oil-producing state posted a surprising jump in oil output in March.
The Energy Information Administration estimates that Bakken output was little changed from a record high 1.3 million bpd in March, but expects it to fall by 70,000 bpd over the following three months
Others still see growth through May. PointLogic, which uses real-time natural gas flow data to forecast oil production, estimates output rose by 31,000 bpd in April versus March and kept rising through May before turning lower recently, according to data made available to Reuters.
Last week, North Dakota's crude-by-rail loadings averaged 437,000 bpd at monitored terminals, the lowest level since mid-March, industry provider Genscape said. Meanwhile, Enbridge's (ENB.TO) North Dakota pipeline system has run close to capacity, signifying that production has fallen.
The rise in differentials differs from the brief rally in mid-2013, when the North Dakota crude traded at a premium. At that point, competing new infrastructure bid up prices.
This time it is largely about supply from Canada. U.S.-bound exports averaged under 2.8 million bpd in May, EIA data shows, down 360,000 bpd from April - the biggest such monthly decline ever.
Syncrude Canada's oil sands output has fallen by more than 50 percent between January and May on a planned turnaround.
And recent Alberta wildfires hit production from companies including MEG Energy (MEG.TO) and Cenovus Energy Inc (CVE.TO). Benchmark WCS differentials climbed to a five-year high, trading at a $7.00 discount last week.
Cold Lake crude, most directly affected, is much heavier than Bakken light, but traders say that refiners have adjusted their slates to step up Bakken buying.
"Why pay -$8 (vs WTI) for Cold Lake when you can pay -$0.50 for Bakken?" said one trader. "That puts a bid behind Bakken."
Meanwhile, Midwest refiners are running at full speed ahead of summer gasoline demand. PADD 2 throughput rose to 2.7 million bpd last month, the highest ever for May and up 3 percent from a year earlier, EIA data shows.
It is unclear how long the strength may last. Canadian production is already recovering and Midwest refinery runs REFCR-2-EIA have fallen for the past three weeks.
In addition, traders say elevated Bakken prices have priced out East Coast refiners that have been buying about a third of output, EIA data shows.
Just last week, the Bakken and West Africa Qua-Iboe BFO-QUA differential tightened to the smallest since June 2013. With the arbitrage opening for imported crude, Bakken barrels may soon be seeking new homes.
"The question is just how fast are people reacting?" said Sandy Fielden at RBN Energy. "How quickly are people jumping off rail and into pipeline? For the short term, there's more demand from Midwest refiners. But will it stay?"
(Editing by Jessica Resnick-Ault, Jonathan Leff and Matthew Lewis)