December 12, 2017 / 8:06 PM / 2 years ago

Heavy barrels hit widest discount in four years

CALGARY, Alberta (Reuters) - The discount on Canadian heavy crude slumped to its deepest level in four years on Tuesday, hurt by export pipeline outages and high storage inventories in western Canada.

Western Canada Select heavy blend crude for January delivery in Hardisty, Alberta, weakened to $26.50 per barrel below the West Texas Intermediate benchmark, according to Shorcan Energy brokers, accelerating recent losses. On Monday WCS settled at $23 per barrel below WTI.

The discount is the widest since December 2013 and a blow to Canadian producers who had been enjoying a rally in U.S. crude, which is trading near its highest level in two years.

The blow-out in differentials put the outright price of WCS at just under $31 a barrel.

Pipeline company Enbridge Inc said on Monday there will be extra rationing of space in December on its Mainline network, which transports the bulk of Canadian crude to the United States, because of unplanned outages in the western part of its system.

Pipeline apportionment drives Canadian prices lower because it leads to a glut of crude building up in Alberta. Storage inventories in the oil sands province are already high after a nearly two-week shutdown of TransCanada Corp’s Keystone pipeline in November because of a spill in rural South Dakota.

The 590,000-bpd Keystone pipeline is running with pressure reduced by 20 percent on the orders of U.S. regulators, and TransCanada has not said when that will lift.

One Calgary-based crude trader said it was likely some market players were hitting position limits after the steep falls over the last week, and being forced to sell barrels to contain losses.

“The barrels are just backing up faster than they can be cleared right now even though everybody is scrambling to get supply on the rails,” said Martin King, an analyst with GMP FirstEnergy.

Crude-by-rail shipments are expected to rise next year as oil sands supply from new projects such as Suncor Energy’s Fort Hills increases and outpaces pipeline capacity.

King said he expected differentials to average around $15 a barrel below WTI in 2018 given the extra costs associated with rail, but the current deep discount was unlikely to last.

Light synthetic crude also fell sharply on the pipeline congestion, which comes as supply from an 80,000-bpd expansion at Canadian Natural Resources Ltd’s Horizon oil sands project ramps up.

Synthetic crude for January delivery traded at $3.00 per barrel below WTI, down from Monday’s settle of $2.30 per barrel below the benchmark.

Reporting by Nia Williams; Editing by Chizu Nomiyama and Susan Thomas

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