Wednesday, February 15, 2012

Deep discounts fuel Canadian oil flow into storage

Oil inventories at Canada's largest storage site are on the rise as discounts for the crude plumb new depths, a company that tracks tank volumes across North America.

Oil volumes at the Hardisty, Alberta, storage site have climbed 350,000 barrels on the week to 8.2 million, which puts capacity use at 48%, said Abudi Zein, senior vice-president at Genscape.

That is about midway between the 2011 highs and lows, but the trend is up as production volumes rise in Western Canada and volumes also grow at the Cushing, Oklahoma, storage hub, depressing prices for land-locked crude supplies in many parts of the continent, Zein said.

Last year's high was about 11 million barrels in August and the low was about 5.8 million in December.

Over the past week, Western Canada Select heavy blend for March deliver has fallen past $35 a barrel under benchmark West Texas Intermediate and has lately hovered in the low $30s per barrel under WTI.

Light synthetic has fallen into the low $20s per barrel under WTI, reaching record discounts. It sold for a premium as recently as December.

‘My impression is that one of the guiding factors is basically absence of disruption. There have been no accidents in an industry that has been accident-prone and that has built up supplies and they have to go somewhere,’ Zein said.

On Tuesday, Canadian Natural Resources Ltd said production at its 110,000 bpd Horizon oil sands project was curtailed due to unplanned maintenance, but that led to just a brief contraction in synthetic price spreads.

Traders and analysts have tied the weakness to surging oil sands production volumes and limited pipeline capacity out of Western Canada. That problem has been exacerbated by surging output from the Bakken shale region of North Dakota, where the crude competes with Canadian supply for pipeline space to U.S. Midwest and Midcontinent markets.

According to the state, output hit 534,900 bpd in December, up nearly 200,000 bpd in a year.

North Dakota's production has surged over the past two years, eclipsing that of OPEC member Ecuador, due to shale oil development.

Traders said any player with empty tank space will buy up supplies at current prices, as further big drops are seen as unlikely.

Zein said another factor in the price weakness has been the warm winter in Canada and the United States, which has slashed demand for heating oil.

In the US storage, volumes at Cushing rose 367,000 barrels to 30.49 million last week, the US Energy Information Administration said on 8 February.

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