May 5, 2016 / 5:01 PM / in a year

Canadian oil surges as wildfire knocks out more production

Smoke from wildfires near Fort McMurray, Alberta, Canada are shown in this satellite photo from NASA taken May 3, 2016. Courtesy NASA/Handout via REUTERS

NEW YORK (Reuters) - Canadian crude prices hit their highest levels in nearly a year on Thursday, as a raging wildfire in northern Alberta shuttered nearly one-third of the nation’s oil sands production and closed key pipelines, raising concerns about temporary shortages.

At least 680,000 barrels per day of crude output is offline, according to Reuters calculations, out of Canada’s total oil sands production of 2.2 million barrels a day, though some operators, including Syncrude, have not disclosed how much production has been shut.

The light synthetic crude grade from the oil sands for May delivery doubled to a premium of $7.10 a barrel over West Texas crude in thin volume on Thursday, according to Shorcan, up from the previous settlement at $3.50 a barrel.

That was the largest premium to the U.S. benchmark since June of last year, a sign of concern about a short-term supply crunch even as the U.S. market remains awash with material.

So far, the wildfire has forced eight oil sands operators, including Suncor Energy Inc, Shell Canada and others to reduce production and evacuate operations near the city of Fort McMurray on Thursday as the massive blaze spread south. Officials said they expected the fire to grow later in the day.

The wildfire also stymied transportation of crude and feedstocks normally delivered via trains, pipelines and roads across the vast oil sands, which hold the world’s third-largest crude reserves after Saudi Arabia and Venezuela.

“These are pretty sizable numbers,” said Mike Tran, energy strategist at RBC Capital Markets. “How quick it returns is based on how quickly they can get staffing back, given the entire space has been evacuated.”

The big cuts by some of the world’s major producers boosted prices, even as concerns about immediate supplies to refineries across the border from Texas to Ohio that use its heavy crude were limited due to record high inventories.

Western Canada Select heavy blend crude for June delivery at one point traded at $11.50 a barrel under the West Texas Intermediate benchmark, according to Shorcan Energy brokers.

That was the narrowest discount since late February, and significantly tighter than Wednesday’s settlement of $12.70 a barrel under U.S crude. WCS was last at $11.80 a barrel under U.S. crude.

Earlier this week, the entire population of 88,000 people in Fort McMurray was ordered to evacuate as the fire grew, incinerating dozens of homes.

The forecast has called for cooler temperatures and a possibility of rain, offering hope that controlling the blaze could become easier.

More than 20 oil operations are clustered in a 100-kilometer (60-mile) radius of the city, according to government data, located within the Athabasca oil sands in Alberta.

“For U.S. balances, it potentially speeds up the rebalancing process as it means refiners may need to draw down inventory” at either the U.S. storage hub of Cushing, Oklahoma, or Patoka, Illinois, said Dominic Haywood, an energy analyst at Energy Aspects in London.

LIMITED FOR NOW

According to Genscape, which monitors key terminals in Western Canada, including the critical locations at Edmonton and Hardisty, total inventories were 26.5 million barrels at the end of April.

That is equivalent to five weeks of the production currently offline.

But some traders were concerned that the shutdown of several Inter Pipeline systems would affect supplies of other feedstock and hurt output at operations far away from the fire.

Statoil ASA said Thursday that it had cut its production at its Leismer oil sands project, about 120 km south of Fort McMurray, by 50 percent due to diluent shortages as a result of the pipeline shutdown.

Diluent, a thinning agent, is blended with bitumen, the thick petroleum sourced in the oil sands necessary to produce the Western Canadian benchmark

Several U.S. refiners contacted by Reuters that use Canadian crude said so far they did not see an impact in terms of deliveries. The U.S. imports about 3.5 million barrels of Canadian crude per day.

The fire also caused a notable move in benchmark West Texas crude, which rallied by as much 4 percent, fueling expectations that the outages will erode the U.S. supply glut. Crude settled at $44.32 a barrel, up 1.2 percent.

Additional reporting by Catherine Ngai in New York, Erwin Seba in Houston and Nia Williams in Calgary; Editing by Bernard Orr

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