Analysis: Canadian oil price spreads painful, not permanent

Tue Feb 7, 2012 4:03pm EST
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By Jeffrey Jones

CALGARY, Alberta (Reuters) - Tight oil pipeline capacity, surging output in Canada and in North Dakota and reported refinery outages have pushed discounts for Canadian crude to new depths, but the painful spreads for producers won't likely be permanent.

Light synthetic crude for March delivery was selling for a bargain-basement $20 a barrel under benchmark West Texas Intermediate crude on Tuesday, compared with a record of $22 a barrel under WTI a day earlier.

Reports of an unscheduled outage at Canadian Natural Resources Ltd's (CNQ.TO: Quote) Horizon oil sands plant tightened spreads a bit on Tuesday, but as recently as December the crude sold for a premium to WTI.

At today's U.S. price, the crude wrung from the Alberta oil sands and upgraded into refinery-ready feedstock was fetching around $78.50 a barrel on an absolute basis, or just 68 percent of the international benchmark Brent oil price.

Western Canada Select heavy crude was hit too. It sold for $31.25 a barrel under WTI, representing a gain from Monday when it sank to $35.50 under. It was worth $17.70 under WTI a month ago.

The drops are steep, and analysts see many of the reasons as short-term. But they are indicative of a coming squeeze in pipeline capacity for Canadian oil, as politicians, the industry and environmental groups battle over building new pipelines into the United States and to the Pacific Coast.

Meanwhile, the price difference between WTI and international benchmark Brent has also ballooned again due to clogged pipeline and storage capacity in the U.S. Midwest and Midcontinent regions, where much of the Canadian supply gets refined or stored.

"We've been saying for quite awhile that for 2012 we're going to see wider price differences between Canadian crude generally and global crudes," said Jackie Forrest, who leads oil sands analysis at energy consultancy IHS CERA.   Continued...