Oil sands crude is on sale, again.
Heavy crude prices turned sharply lower this week as restrictions on key export pipelines force surging production into storage, dealing a blow to government finances and corporate revenues.
Western Canadian select (WCS), a blend of conventional heavy crude and bitumen from the oil sands, has been under pressure from reduced flows on TransCanada Corp.'s Keystone pipeline and space rationing on Enbridge Inc.'s mainline system, which together move most Canadian crude to U.S. markets.
The restrictions come just as Suncor Energy Inc.'s $17-billion Fort Hills mine and other expansions gear up, pushing the discount on Canadian heavy crude to more than double levels seen earlier this year.
On Wednesday, WCS barrels for delivery in January changed hands for $29.75 (U.S.), a discount of $26.85 against U.S. benchmark West Texas intermediate, broker Net Energy Inc. said. Some lightly traded December volumes fetched $33 below WTI.
"Certainly a good majority of that is related to Keystone and some of the increase you're starting to see at Fort Hills as well," said GMP FirstEnergy analyst Martin King in Calgary.
Crude had already backed up in Alberta after a 5,000-barrel spill in South Dakota shut the Keystone pipeline for two weeks last month. The 590,000-barrel-a-day pipeline has restarted at reduced rates, but the company has not said when it would return to normal service.
Exports were also crimped after Enbridge said it would ration space for December on its Alberta-to-Wisconsin Line 67 pipeline, adding to heavy restrictions already in place. The line carries 450,000 barrels a day (b/d).
Such constraints are seen as temporary, but they also point to major headwinds for Alberta producers and the provincial government, which relies on energy royalties to fund a big chunk of its budget.
"Canadian crudes have run into the perfect storm with issues plaguing several major pipelines," said Michael Tran, an energy strategist at Royal Bank of Canada.
"This again underscores the structural issues surrounding lack of takeaway capacity."
Oil sands crude trades at a discount because it must be shipped over long distances to refineries and because it requires more processing to turn into gasoline and diesel.
In 2013, the price gap, known as the differential, ballooned to $40 a barrel, prompting then-Alberta premier Alison Redford to warn of a $6-billion (Canadian) hole in the provincial budget.
Few are predicting a repeat scenario, but rising production is once again testing the limits of available pipeline space, forcing producers to pay more to ship excess barrels by train.
Alberta Premier Rachel Notley on Wednesday said the price weakness shows the industry urgently needs more export routes, including Kinder Morgan Canada Ltd.'s proposed Trans Mountain expansion to the West Coast.
"It highlights again and underlines why we need to get moving on the pipeline," she told The Globe and Mail.
Enbridge sees its mainline system, which carries 2.85 million b/d, staying full as 850,000 barrels a day of new supply comes online through 2022, a top executive said this week.
Expansions include Suncor's Fort Hills mine, which is expected to produce 20,000 to 40,000 b/d in the first quarter of next year, numbers that would rise from there over time.
Those barrels are hitting a market awash in crude. Total western Canadian crude held in storage rose 900,000 barrels last week from a week earlier to about 32 million barrels, according to data firm Genscape Inc. A year ago, inventories were about 28 million barrels.
"People are just scrambling right now to try and find rail to put it on, but there isn't enough rail currently to absorb the impact of how much supply is coming through," analyst Mike Walls said.
With a report from Kelly Cryderman in Calgary