(Repeats story from earlier with no changes)
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.
The main pipelines carrying heavy oil into the U.S. Midwest, including the Line 4 and 67 part of Enbridge Inc's Mainline system, as well as TransCanada Corp's Keystone pipeline, have no little to no space for additional barrels, according to four physical traders who move oil on those lines.
Plans for additional output include Cenovus Energy Inc's Christina Lake phase F and Foster Creek phase G expansions in the third quarter, which will ramp up to 390,000 bpd on a gross basis over the next 12 to 18 months, as well as Husky Energy's 60,000 bpd Sunrise project in early 2017.
The impending squeeze is reminiscent of 2013, when Alberta's government was forced to borrow billions to cover a drop in revenue due to the so-called "bitumen bubble," a term coined as a result of the province's inability to move oil-sands derived bitumen to export, although WCS prices hovered closer to $40 a barrel discount then.
Enbridge Inc recently told shippers that it will allocate a heavier synthetic crude, known as OSH, along its Line 3 pipeline, which had been running only light crude in the second quarter, according to two trading sources familiar with the plans.
A company spokesman confirmed that its Mainline was running at full capacity and moving record volumes, with averages of 2.5 million bpd from Gretna, Manitoba. He declined to comment on deliveries on Line 3.
At a TD Energy Conference in Calgary on July 6, Kristopher Smith, Suncor Energy's executive vice president for refining and marketing, said producers are likely to "hit a (capacity) pinchpoint in the next few years," pointing to the overbuild in rail capacity as a short-term fix.
However, analysts said prices will need to keep falling before that makes economic sense.
Reporting by Catherine Ngai; Editing by David Gaffen and Tom Brown