May 5, 2016 / 12:55 AM / a year ago

Raging oil sands wildfire sends differentials surging

4 Min Read

CALGARY, Alberta/NEW YORK (Reuters) - Canadian heavy crude differentials hit their strongest level in two months on Wednesday as a wildfire raging in Fort McMurray in the heart of Alberta's oil sands region forced some projects to cut output and pipelines to shut down.

The city's population of around 88,000 was ordered to leave immediately on Tuesday evening as the fire breached city limits and ripped through some neighborhoods.

By Wednesday afternoon, city officials said the blaze could grow even worse and a slew of oil sands operators including Suncor Energy Inc (SU.TO), Syncrude and Shell Canada (RDSa.L) said they were reducing production.

Although the blaze is not directly threatening any facilities in the vast oil sands, which hold the world's third-largest crude reserves after Saudi Arabia and Venezuela, it disrupted some operations.

Producers cut production to allow workers to evacuate safely, and Inter Pipeline Ltd (IPL.TO) partially suspended one diluent pipeline and shut down its Corridor pipeline system, which serves Shell's operations.

A domino effect quickly emerged, as Husky Energy (HSE.TO) was forced to reduce production at its oil sands project because of the Inter Pipeline diluent shutdown, suggesting more projects may be forced to follow suit.

The full impact of cuts on oil sands production, which totals about 2.2 million barrels per day, was not immediately clear but Husky said it had reduced output by 20,000 barrels per day and Shell's production capacity is 255,000 bpd.

"If it (the production cuts from the fire) starts dragging into a week or so, the impact will become more acute," said FirstEnergy Capital analyst Martin King.

Other companies operating nearby include Canadian Natural Resources Ltd (CNQ.TO) and CNOOC Ltd (0883.HK) subsidiary Nexen Energy, which said their operations were not affected.

The reduced oil sands production helped prop up benchmark Canadian cash grades, as well as place a support under global prices, though analysts and traders said the boost would likely be short-lived.

"My feeling is that this has minimal impact on production longer-term," said Tim Pickering, founder and chief investment officer at Auspice Capital Advisors in Calgary. "When we think about taking production offline, there's still a significant amount of oil in storage. That's a big cushion."

Western Canada Select heavy blend crude for June delivery SHRWCSMc2 last traded at $12.70 a barrel under the West Texas Intermediate benchmark, the narrowest discount since the start of March, according to Shorcan Energy brokers.

It settled on Tuesday at $13.35 per barrel under WTI.

Light synthetic crude from the oil sands for June delivery SHRSYNMc2 last traded at $1.00 a barrel above U.S. crude futures CLc1, the strongest since the start of April, compared with a 5-cent discount the previous day.

Editing by Alan Crosby and Matthew Lewis

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