Canada Oils Gain on Speculation Seasonal Demand Drop Overdone

Canadian crudes strengthened on the spot market versus the U.S. benchmark on speculation that declines caused by a seasonal softening of demand were overdone.

Western Canadian Select heavy crude for November delivery rose $1.75 a barrel to a $30.50 discount to West Texas Intermediate, according to Calgary oil broker Net Energy Inc. The differential has shrunk by $4 a barrel from an eight-month high Oct. 4.

“We’ve seen some narrowing, but the market is still trading at wide levels due to unfavorable fundamentals,” said David Bouckhout, senior commodities strategist at Toronto-Dominion Bank in Calgary.

Canadian grades weakened over the past two months because of a seasonal decline in demand from U.S. refineries, increased production in Canada and pipeline constraints.

Refineries in PADD 2, or the U.S. Midwest, scaled back operations by 7.3 percentage points over the past four weeks to 86.5 percent of capacity, U.S. Energy Information Administration data show.

Canadian oil-sands production is forecast to continue growing this year, by 10.5 percent to 1.99 million barrels a day, according to a June forecast by the Canadian Association of Petroleum Producers.

Syncrude, a light oil processed from oil-sands bitumen, gained $1.35 a barrel to a $9.65 discount to WTI, NetEnergy said. The grade had fallen to a $13.65 discount, the widest in 18 months, on Oct. 4.

Syncrude Output

Syncrude production is increasing as three upgraders in Alberta and Saskatchewan ramp up operations after maintenance. Output from the Syncrude plant near Fort McMurray, Alberta, rose 39 percent last month to 291,000 barrels a day, according to Canadian Oil Sands Ltd.

Pipeline company Enbridge Inc. said shipments this month on Mainline lines 2 and 3, which transport a combined 678,700 barrels a day of light and synthetic oil from Edmonton, Alberta, to Superior, Wisconsin, were overbooked by 12 percent, meaning there was more demand to ship light grades than there was space available.

Bouckhout said he expects Canadian crude discounts to widen from average levels next year due to increasing supplies and continued constraints on export pipelines, with Syncrude average prices at parity or slightly negative to WTI and the WCS discount in the mid-$20 range.

Syncrude has traded at a $1.81-a-barrel average premium to WTI so far this year and WCS at a discount of $23.84 a barrel, according to data compiled by Bloomberg.

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