Price of Canadian crude falls over backlog (RTGAM)

Gregory Meyer, Ed Crooks

New York — Crude oil from Canada is being offered for half of international prices as increasing output from the world’s sixth biggest producer threatens to overwhelm regional pipelines and refineries.

Western Canada Select, blended from heavy oil sands crudes, this week sold for $62.42 (U.S.) a barrel, according to data from Platts, the energy information service. Brent crude, the global benchmark, on Tuesday topped $117 for the first time since August.

This represents the deepest discount to U.S. crude in more than four years, reflecting Canadian producers’ few options for delivering their oil and problems at refineries in the region. It comes weeks after U.S. President Barack Obama blocked plans to build the new Keystone XL pipeline, which would carry more than one million barrels a day from Alberta to refineries in Texas.

Oil production in western Canada grew by 7 per cent last year, according to the National Energy Board. Suncor energy Inc., the leading producer in the oil sands, this week said output rose by 2.9 per cent in January from the previous month.

Canada, the top oil exporter to the U.S., has encountered a new competitor in neighbouring U.S. states such as North Dakota where output has topped 500,000 barrels a day. All have been bidding for pipeline space leading into the U.S. Midwest, whose oil market is largely disconnected from global flows.

“There is a lot of crude being produced,” said Lawrence Eagles, global head of oil research at JP Morgan. “There is demand for that crude. The problem is getting it to market.”

Global oil prices have meanwhile soared as tensions mount over Iran’s nuclear program. Brent, based on crudes from the North Sea, has gained 9 per cent from the start of the year. This week Canadian Prime Minister Stephen Harper is visiting China with a delegation that includes the chief of Enbridge Inc., the pipeline company, to discuss ways of diversifying energy exports.

Only one pipeline, Kinder Morgan Inc.’s Trans Mountain line, runs west to the Pacific from the oil sands. Others lead into the US. Enbridge, along with Enterprise Products Partners, is planning to reverse a pipeline in June that would help bring Canadian oil to the Gulf of Mexico.

“Location matters: that’s really the sum of it. If you can’t get crude down the pipeline to where the refineries are, its value plunges,” said David Greely, head of energy research at Goldman Sachs.

Others analysts said the low prices for Canadian crude did not reflect a shortage of cross-border pipeline capacity, but congestion resulting from refinery outages in the U.S. Midwest. Prices for fuels in the Midwest have fallen relative to other U.S. markets, giving an incentive for refineries to slow down their crude purchases.

Martin King, an analyst at First Energy, said he expected the wide spread to be a “troubling short-term” issue, which would be resolved as refining capacity came back on stream and the crude backlog was cleared.

Rising flows of oil from Canada and the central U.S. have also driven West Texas Intermediate , the U.S. benchmark, to a $19 (U.S.) a barrel discount to Brent.

“Everybody’s got to compete against the lowest prices. Right now that lowest price is being driven by the Canadians,” a senior U.S. oil executive at a commodity merchant said.