Bottlenecks expected as more Canadian oil meets tight pipe space

Mon Jul 11, 2016 1:00am EDT
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By Catherine Ngai

CALGARY, Alberta, July 11 (Reuters) - Deeply-discounted prices for heavy crude from the heart of Alberta's oil sands look set to sink further, thanks to hundreds of thousands of barrels of new supply that will have difficulty finding space in crowded pipelines, traders say.

It would be another hit for Canada's ailing oil sands producers, who have slashed millions in capital expenditures and been forced to lay off thousands of workers over the two-year downturn in oil prices.

Until recently, pipeline space in Alberta has not been an issue as May wildfires took about half of the oil sands' production capacity offline. But most of that production is now back, and more bitumen is set to come online in late 2016 and early 2017, without additional infrastructure to move it.

Traders are already starting to sell off foward prices for Western Canadian Select, the heavy crude benchmark. On Friday, it settled at $15 a barrel below the U.S. West Texas Intermediate crude benchmark, according to Shorcan Energy brokers. A month ago, it was trading at a $14.72 discount.

Traders say it could fall another $2 to $3 in coming weeks as U.S. refiners move into heavy fall maintenance.

Current in situ bitumen supply is estimated at between 1.3 to 1.4 million bpd; non-upgraded bitumen supply is expected to rise by 200,000 bpd in 2016 and by another 110,000 bpd in 2017, RBC Capital Markets said earlier this year. Canadian producers have some of the highest cost structures among those in North America, so limited pipeline space to deliver that crude will hurt profits.

"There's a fair amount of juggling that pipeline companies can do with crude oil, and they haven't been running up against those limitations for the past several months because of the wildfires," said Sandy Fielden, director of commodities and energy research at Morningstar.

"If production expands, though, we'll see congestion in the system. Heavy crude will get discounted further against WTI and price spreads will then blow out," he added.   Continued...