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) 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.
"Our view is there still is not enough takeaway capacity in the Midcontinent and the (synthetic crude) supply is growing ... but at the same time we've got a lot of growth from the Bakken. In fact, the Bakken crudes, as of yesterday, were facing similar discounts to synthetic crude oil."
Production from the Bakken shale oil region of North Dakota has been increasing at a clip of 4 percent to 5 percent a month, according to JP Morgan.
Both Suncor Energy Inc (SU.TO) and Syncrude Canada have boosted production in recent months after finishing planned and unplanned shutdowns in late 2011 at their sprawling oil sands operations in northern Alberta.
Enbridge Inc (ENB.TO) has been forced to cut back shipper nominations on various pipelines to the U.S. Midwest due to overbooking. Kinder Morgan's KMP.N Trans Mountain pipeline to the Vancouver area is also routinely overbooked.
Adding to pressure in the last week, BP Plc's (BP.L) 405,000 bpd Whiting, Indiana, refinery, the largest U.S. buyer of synthetic crude had a major processing unit down for unplanned work, according to sources. That work was said to be completed over the weekend.
In a research report, FirstEnergy Capital Corp analysts said they believe the blow-out in differentials should begin to reverse in coming weeks. However, they held out little hope for a return to the tight spreads of 2011 due to structural issues.
Those include the surge in Bakken oil production, which competes for space on the Enbridge pipeline system. The reversal of the Seaway line to the Gulf Coast of Texas from the Cushing storage hub, a growing destination for Canadian supply, will also alleviate some of the glut, FirstEnergy analyst Martin King said.
The reversal of that pipeline by Enbridge and Enterprise Product Partners EPD.TO, recently delayed by a couple of months to June. Will move 150,000 bpd a day, rising to 400,000 bpd in 2013.
"It's become a hot topic over the past five days, that's for sure. We've had a lot of calls from the buy side and some of the corporates to explain what's happening and why," he said.
The industry has estimated that, based on current forecasts for the oil sands and Bakken crude, the spare capacity to move crude out of Western Canada and North Dakota would be filled by 2015 without any new expansions. By then output could be 3.5 million bpd day, about a million bpd more than in 2011.
However, expansions of existing pipelines, such as Enbridge's Alberta Clipper, are possible before that time, which would push that deadline out a few years.
There is still much uncertainty over approvals for TransCanada Corp's $7 billion Keystone XL pipeline to Texas, which could be given a green light by Washington next year, and Enbridge's C$5.5 billion ($5.5 billion) Northern Gateway pipeline to the Pacific coast, now the subject of regulatory proceedings expected to last to the end of 2013.
Both are aimed at improving returns for oil sands producers by expanding overall capacity and allowing the crude to be priced against the more valuable international supplies.
The last time Canadian heavy crude dipped into the $60 a barrel range, companies began to shut off some output, although that was due to a lack of storage space, said JP Morgan analyst Lawrence Eagles.
"However, with discounts of over $35 a bbl, the market is signaling that we will soon reach capacity limitations. If so, regardless of future aspirations, short-term Canadian output growth is likely to slow," Eagles said in a research note.
Meantime, shares of some of the largest producers have been hit as differentials have widened.
Canadian Natural was pressured the most on Tuesday, although analysts tied much of that to the unexpected outage at the 110,000 bpd Horizon project. Its shares fell nearly 5 percent to C$38.41 on the Toronto Stock Exchange.
Canadian Oil Sands Ltd COS.TO, the largest syncrude stakeholder, was down 2.5 percent at C$23.64, MEG Energy Corp (MEG.TO) was down 5 percent at C$43.28 and Suncor was off 1 percent at C$34.56.
"The Canadian producers will probably be under a little pressure though the first quarter and it wouldn't surprise me if the second quarter starts out weak," said Randy Ollenberger, analyst at BMO Capital Markets.
"The first quarter won't be pretty."
Additional reporting by Scott Haggett; editing by Rob Wilson