May 5, 2016 / 10:56 PM / 4 years ago

UPDATE 3-Canadian oil surges as wildfire knocks out more production

* At least nine producers cut output
    * June synthetic settles at $2.15/bbl above WTI
    * June WCS settles at $12.00/bbl below WTI

 (Updates with diluent pipeline reopening, price settles)
    By David Gaffen
    NEW YORK, May 5 (Reuters) - Canadian crude prices rallied on
Thursday as a raging wildfire in northern Alberta shuttered
nearly one-third of the nation's oil sands production and closed
some pipelines, raising concerns about temporary shortages of
feedstock to U.S. refineries.
    The massive fire forced all 88,000 residents of Fort
McMurray, home to thousands of oil sands workers, to evacuate
the city on Tuesday night as it burned down whole neighborhoods
and continues to blaze out of control. 
    Oil sands companies have shut in at least 690,000 barrels
per day of crude output, according to Reuters calculations, out
of Canada's total oil sands production of 2.2 million barrels a
day, though some operators, including Syncrude and Imperial Oil
, have not disclosed how much production is offline.
    Light synthetic crude from the oil sands for June delivery
settled at $2.15 per barrel above the West Texas Intermediate
benchmark, according to Shorcan Energy brokers, surging from
$1.00 per barrel over WTI on Wednesday.
    The less liquid May contract jumped even more dramatically,
doubling from the previous day to a premium of $7.00 over U.S.
crude. That was the largest premium since June of last year, a
sign of concern about a short-term supply crunch in Alberta.
    So far, the wildfire has forced nine oil sands operators,
including Suncor Energy Inc and Shell Canada to
reduce production because workers have had to flee the city, and
in some cases evacuate operations as a precaution. Officials
said they expected the fire to grow later in the day.    
    The wildfire also stymied transportation of crude and
feedstocks normally delivered via trains, pipelines and roads
across the vast oil sands, which hold the world's third-largest
crude reserves after Saudi Arabia and Venezuela. 
    "These are pretty sizable numbers," said Mike Tran, energy
strategist at RBC Capital Markets. "How quick it returns is
based on how quickly they can get staffing back, given the
entire space has been evacuated." 
    The big cuts by some of the world's major producers boosted
prices, even as concerns about immediate supplies to refineries
across the border from Texas to Ohio that use its heavy crude
were limited due to record high inventories. 
    Western Canadian Select (WCS) heavy blend crude for June
delivery at one point traded at $11.50 a barrel
under the West Texas Intermediate benchmark, according to
Shorcan.
    That was the narrowest discount since late February, and
tighter than Wednesday's settlement of $12.70 a barrel under U.S
crude. WCS setttled at $12.00 a barrel under U.S. crude.
    Even so, the rally in Canadian heavy crude is not as sharp
as during wildfires in the Cold Lake region last year, when 10
percent of oil sands production went offline and WCS tightened
to within $7 a barrel of U.S crude. Currently, several
facilities, including those operated by Suncor and Shell, had
already reduced production due to maintenance prior to the
fire's eruption.
    "There's lots of turnarounds going on up there so I don't
know if it screwed up that many people. All that stuff was
priced into the market already," said a Calgary-based oil
trader. 
    More than 20 oil operations are clustered in a 100-kilometer
(60-mile) radius of Fort McMurray, according to government data,
although most of the mega-projects are to the north of the city,
while the fire is moving south.
    
    LIMITED FOR NOW
    According to Genscape, which monitors key crude storage
terminals in Western Canada, including the critical locations at
Edmonton and Hardisty, total inventories were 26.5 million
barrels at the end of April. 
    That is equivalent to five weeks of the production currently
offline.
    Pipelines were also affected by the fire, with Enbridge Inc
 shutting down its Cheecham terminal and Inter Pipeline
temporarily closing its Polaris diluent pipeline, forcing some
producers like Husky Energy to reduce supply because of
lack of condensate.
    Inter Pipeline reopened Polaris on Thursday afternoon as the
fire moved further away from it.
    Statoil ASA said Thursday that it had cut its
production at its Leismer oil sands project, about 120 km south
of Fort McMurray because of a shortage of diluent, which is
blended with viscous bitumen to produce WCS.
    Several U.S. refiners contacted by Reuters that use Canadian
crude said so far they did not see an impact in terms of
deliveries. The U.S. imports about 3 million barrels of Canadian
crude per day. 
    "For U.S. balances, it potentially speeds up the rebalancing
process as it means refiners may need to draw down inventory" at
either the U.S. storage hub of Cushing, Oklahoma, or Patoka,
Illinois, said Dominic Haywood, an energy analyst at Energy
Aspects in London.    
    The fire also caused a notable move in benchmark West Texas
crude, which rallied by as much 4 percent, fueling expectations
that the outages will erode the U.S. supply glut. Crude settled
at $44.32 a barrel, up 1.2 percent. 

    
 (Additional reporting by Catherine Ngai in New York, Erwin Seba
in Houston and Nia Williams in Calgary; Editing by Bernard Orr
and Andrew Hay)
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