October Western Canadian Select weaker as supply seen rebounding

Houston — Western Canada's benchmark heavy crude is trading sharply weaker at the start of the October pipeline cycle on what traders say is the expectation production will continue ramping up in the second half of the year.

Western Canadian Select at Hardisty, Alberta, was heard to trade at WTI CMA minus $11.95/b for the October cycle Aug. 18, $2.80/b weaker than a month ago on the final day of the September cycle.

"The expectation is that more production is coming online," one trading source in Calgary said.

The differential for WCS Hardisty had been expected to weaken sooner, helping to incentive flows to the US Midwest and USGC. But WCS ended the September cycle at a one-month high after traders said production had failed to ramp up fast enough to meet expectations.

"What's happening up here is producers are coming up short for August deliveries," another trader in Calgary said. There have been "issues upstream and they probably overforecasted how much they can get out of ground."

One such incident was a fire Aug. 14 that affected production at a Suncor Energy base plant. Bitumen mining at the plant in Fort McMurray, Alberta, will be halted until early September as a result of a fire, Suncor said in a statement.

The trader said that the market had been in "a constant rally" through the September cycle.

But with weaker differentials for the October cycle, the arbitrage to the US Gulf Coast has improved. The Hardisty/Nederland, Texas, spread closed at $6.55/b Aug.17 and was heard as wide as $8.55/b Aug. 18, based on the most recent indications.

Further bearish factors weigh on Canadian grades, including expectations of continued weak US refinery utilization. Analysts surveyed by Platts Aug. 17 expect a 0.3 percentage point climb in utilization rates in fresh weekly US Energy Information Administration oil data this week. While this would bring rates to 81.3% of capacity -- the highest since late-March -- they would still be around 15% below the five-year average of EIA data.

Still, EIA data also shows US refiners are buying more Canadian crude, particularly in the US Midwest. Total US imports of Canadian crude rose to a four-week average of 3.467 million b/d in the week ended Aug. 7, up from the low for the year of 2.994 million b/d in the week ended May 29.