No quick end seen to deep Canadian oil discounts

Mon Mar 12, 2012 3:13pm EDT
 
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By Jeffrey Jones

CALGARY, Alberta (Reuters) - Bargain-basement discounts on Canadian crude are more than just a short-term irritant for producers as surging supplies and a limited U.S. Midwest refining market threaten to cut industry-wide revenues by as much C$18 billion ($18 billion) a year, an analyst said on Monday.

Wide light and heavy crude price spreads plaguing the Canadian market since the start of the year could expand even more in the coming two months as numerous refineries begin maintenance, and the end of that work and start of a reversed pipeline to Texas from Oklahoma won't bring permanent relief to fundamental problems, Andrew Potter, analyst at CIBC World Markets, said.

"Discounts are severe," Potter told investors in a conference call. "If you don't think this is a big issue, think again."

He said the situation could last beyond 2013, when the Keystone XL southern portion starts to drain large volumes of supply from the Cushing, Oklahoma, storage hub and moves it to Texas refineries.

The northern, cross-border portion of Keystone XL and or new pipeline capacity to Canada's West Coast are not expected to start up until the second half of the decade.

Another factor that may ease the situation could be a reversal of Royal Dutch Shell's (RDSa.L: Quote) 1.2 million barrel a day Capline pipeline to Illinois from the Gulf Coast, Potter said. One source told Reuters on Monday that the concept is under discussion.

Canadian synthetic crude, derived from the Alberta oil sands, and Bakken light oil, from North Dakota shale deposits, are selling for around $16 a barrel and more under U.S. Benchmark West Texas Intermediate crude and $34 under the international Brent marker.

That compares with premiums to WTI as late as December, and comes at a time when supply is constrained by the unplanned outages at oil sands upgrading plants run by Syncrude Canada Ltd and Canadian Natural Resources Ltd (CNQ.TO: Quote).   Continued...