Canadian oil pain grows as crude discount to WTI hits $40

CALGARY (Bloomberg) -- Canadian heavy crude’s discount to West Texas Intermediate futures increased to the widest in almost five years, raising the specter of local oil producers curtailing operations.

Western Canadian Select’s discount for November fell $1.25 to $40.75/bbl Tuesday, the biggest since November 2013, data compiled by Bloomberg show. The plunge came as new supply from Suncor Energy Inc.’s Fort Hills mine helps to fill pipelines to capacity.

“If you get this sustained wide differential, you are going to see these guys start to ramp down production,” Mike Walls, a Genscape Inc. analyst, said by phone.

When discounts widened to $30/bbl early this year on the back of a pipeline outage, companies including Cenovus Energy and Canadian Natural Resources said they were cutting some production or starting maintenance earlier than planned. Yet, with oil sands maintenance soon to wind down and further maintenance not planned until next spring, there is “no relief valve for the next two to four months,” according to Walls.

Other grades of Canadian crude are also suffering. Light synthetic crude, produced from bitumen processed in an oil sands upgrader, fell to a $19.75/bbl discount to New York futures on Tuesday as Syncrude Canada prepared its upgrader next month back to full production after a plant-wide shutdown in June. New pipeline projects, including the Trans Mountain expansion to the Vancouver area, have been stymied by court-imposed delays.

While increasing volumes of oil are being shifted onto rail cars, the pickup in crude-by-rail has been slow, Walls said. Exports rose 1% in July from June to 207,000 bpd, National Energy Board data show. Cenovus said last month it signed oil-by-rail agreements to ship about 100,000 bpd on tracks, but the agreements won’t go into full effect until the second quarter next year.