Canadian Heavy Crude Slumps to Lowest in at Least a Decade

Heavy Canadian crude slumped to its lowest level in at least a decade on Wednesday after Enbridge Inc closed two of its main pipelines in the United States because of a leak, piling fresh misery on Canadian oil companies that are close to producing at a loss.

 

Western Canada Select heavy blend crude for September delivery last traded at $21.75 per barrel below the West Texas Intermediate benchmark, according to Shorcan Energy brokers, having settled at $19.80 per barrel below on Tuesday.

 

It was the widest differential since August last year and pushed the outright price of Canadian heavy crude to around $22.50 a barrel, a level at which some companies will struggle to cover the cost of production, blending and transportation.

 

That was lower than the 2008 trough of $24.62, according to one trading source, when U.S. benchmark crude plunged to $32 a barrel as a result of the global financial crisis.

 

Enbridge shut down its Flanagan South and Spearhead pipelines in the U.S. Midwest late on Tuesday, with no timeline as to when they will reopen.

 

The pipelines, which have a combined capacity of nearly 800,000 barrels per day, carry crude to the U.S. oil futures hub of Cushing, Oklahoma, and are two of the main conduits linking Alberta's oil sands to refineries on the U.S. Gulf Coast.

 

The shutdown means crude could get bottlenecked in Alberta, putting further pressure on heavy prices which were already being offered lower after BP Plc's Whiting, Indiana, refinery suffered damage over the weekend that could take one to two months to repair.

 

Whiting is one of the biggest consumers of heavy Canadian crude and the reduced demand comes at a time when oil sands production, in particular from Imperial Oil (IMO.TO)'s Kearl oil sands project in northern Alberta, is ramping up rapidly.

 

"This will further weigh on Canadian differentials following the unplanned BP Whiting outage and heavy PADD 2 maintenance starting in September," said Dominic Haywood, an analyst with Energy Aspects.

 

Traders in Calgary described the latest price drop as "horrible", and said many were anticipating mid-month apportionment rationing the volume of crude each shipper can put on Enbridge lines.

 

Flanagan South and Spearhead also transport light and sweet crude and traders said they expected an impact on those grades too.

 

Light synthetic crude from the oil sands for September delivery was bid at $5.25 and offered at $4.50 a barrel below WTI. It settled at $4.30 per barrel below the benchmark on Tuesday.