CALGARY, Alberta (Reuters) - Canadian oil production has been getting hit with deep discounts, even with benchmark crude prices slumping, as U.S. storage space fills up, refinery output slows and key export pipelines remain full.
At the end of December, Canada’s marker light, sweet oil grade, Edmonton Light, fetched $10-$12 less per barrel than West Texas Intermediate, which itself has fallen more than $100 from record highs last summer.
This week, the discount eased to less than $3 a barrel, but companies will show the weakness in fourth-quarter price realizations.
The price moves, which one brokerage called “very strange and alarming,” follow months of wide price spreads, called differentials, for heavy oil and bitumen from the oil sands.
Some issues pressuring prices are expected to dissipate in coming days, while others will linger, said Martin King, analyst at FirstEnergy Capital Corp.
“Some of the crude streams are already starting to normalize, and I think by the end of next week those will be kind of close to historic averages,” King said. “But with Edmonton Light ... it’s going to take a number of weeks to get back to something that looks a little more reasonable.”
He pointed to several issues that have pressured prices for crude from Canada, which is the largest source of foreign supply for the United States.
Benchmark WTI fell 87 cents, or 2 percent, to $40.83 a barrel on Friday as a big jump in U.S. unemployment added to the economic gloom that has pressured oil prices for months.
Weakening demand for fuels as the economy has slowed and record inventories at the major storage hub of Cushing, Oklahoma, are weighing on crude prices across the continent.
U.S. government data this week showed stocks there hit a record 32.2 million barrels as futures prices for June delivery have climbed to about $12 a barrel above prompt delivery, generating a so-called contango effect that provides incentive to squirrel volumes away to sell at a higher price later.
“They’ve taken advantage of that contango as much as they can on a physical storage basis and maybe that is feeding back to Canadian crude supplies as well,” King said.
More specific to Canadian light oil prices has been the changeover of Petro-Canada’s 135,000 barrel a day Edmonton, Alberta, refinery to running oil sands-derived crude exclusively.
Petro-Canada spokeswoman Sneh Seetal said the new equipment installed in the C$2.4 billion retooling is now in start-up mode, but she declined to give production volumes. Still, the company is no longer buying conventional oil for the plant.
The main arteries for crude exports to the key U.S. Midwest refining market are also overbooked as the country’s overall production climbs.
Enbridge Inc has been forced to cut nominated volumes for three pipelines on its 2 million barrel a day system in January by 6 percent, spokeswoman Gina Jordan said. This follows apportionment in December as well.
The company is boosting its capacity over the next several years with billions of dollars worth of expansions.
Editing by Rob Wilson