Heavy Canada Oil Strengthens to 2-Month High on Eastern Lines

Canadian heavy crude oil strengthened to the highest level in two months on increased optimism that new eastern pipelines will resolve some of the bottlenecks in Western Canada’s transport system.

Several Canadian politicians have thrown their support behind proposals to convert existing pipelines to send light oil to refineries on the country’s eastern coast, where it would replace oversees imports and open on space on southbound lines for the heavier crudes.

“The west-east pipeline proposals in Canada are getting more traction, and that is getting some play in the market right now,” said David Bouckhout, senior commodity strategist at TD Securities in Calgary.

Western Canada Select, the benchmark for heavy oil-sands bitumen, strengthened by $1.20 a barrel to a $29 discount to West Texas Intermediate crude, the U.S. benchmark, according to Calgary oil broker Net Energy Inc. It was the narrowest spread since Dec. 4.

Alberta Premier Alison Redford and New Brunswick Premier David Alward are meeting in Calgary today to announce support for a TransCanada Corp. proposal to convert one of its cross-Canada natural gas lines into an oil pipeline. New Brunswick is home to Canada’s largest refinery, Irving Oil Corp.’s 300,000 barrel-a-day plant in Saint John.

Reversing Line 9

Canadian Natural Resources Minister Joe Oliver told the Canadian Press on Feb. 1 that the government supports TransCanada’s proposal, as well as a plan by Enbridge Inc. to reverse its Line 9 pipeline to send 200,000 barrels a day to eastern refineries in Quebec, as long as they meet environmental requirements.

TransCanada said last month it’s still reviewing its conversion proposal, which would cost about C$5 billion ($5.02 billion), be completed in 2017 and replace some of the more than 600,000 barrels a day of overseas imports with North American crude oil.

Longer-dated Western Canada Select crude contracts also gained strength. The contract for April delivery rose $1.50 to a $30.75 discount, according to Net Energy.

Earlier today, BP Plc Chief Executive Officer Bob Dudley said during an earnings conference call that the company’s Whiting refinery in Indiana won’t be able to process heavy Canadian crude at full rates until 2014. Bloomberg News had reported Dec. 14 that the startup of the 225,000 unit being converted to process heavy crude won’t begin ramping up until at least June.

Much of the news about the Whiting delay has been already priced into Western Canada Select, which reached a record discount of $42.50 below West Texas Intermediate on Dec. 14, Bouckhout said.

In a research note today, Paul Cheng, an analyst at Barclays Plc’s investment-banking unit, said that the Western Canada Select price will be depressed until the second half of next year because of limited pipeline and refinery capacity. It will eventually stabilize at a $15-to-$20 discount to WTI, he said.

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