Canada crude -Synthetic discount expected to stay steep

Reuters

* Nov synthetic trades at $10.50/bbl below WTI

* Surging production weighing heavily on synthetic prices

* Nov WCS trades at $29.25/bbl below WTI

CALGARY, Alberta, Oct 16 (Reuters) - Prices for lightsynthetic crude from the oil sands recently slid to the steepestdiscount in 18 months versus the U.S. crude benchmark, and isexpected to stay relatively cheap due to Canada's surgingproduction and congested pipelines.

Some Canadian crude market players said discounts couldbecome the new norm for synthetic grades, which traditionallyhad traded around parity with West Texas Intermediate.

Earlier this month light synthetic crude from the oil sandsfor November delivery traded around $12.50 per barrel below WTI,the widest differential since the first quarter of 2012.

It was last trading at $10.50 per barrel below thebenchmark, according to Shorcan Energy brokers, well below theyear-to-date average of a $2.34 per barrel premium.

"Too much production, not enough pipelines," was how onecrude trader summed up the bearish outlook.

Production at the Syncrude oil sands project in northernAlberta is ramping up rapidly after maintenance on a coker cutvolumes over the summer.

The project produced 291,000 barrels a day in September, up39 percent on the month, and talk among traders in Canada's oilcapital Calgary is that it could hit around 340,000 bpd inOctober, close to record levels.

At the same time, pipeline company Enbridge Inc rationed space on four crude lines on its export network inOctober, a move traders said pushed Western Canadian inventorylevels back towards their maximum.

"Synthetic has been quite volatile over the last two years,largely on the back of pipeline constraints," said DavidBoukhout, senior commodity strategist at TD Securities.

"Looking out further into our forecasts we do expect we aregoing to see prices average below WTI throughout 2014."

That view was echoed by analysts at FirstEnergy Capital inCalgary. While they expect prices to strengthen slightly asrefinery maintenance season draws to a close and pipelinerationing lessens, they forecast a discount of $1 to $2 perbarrel on synthetic crude for much of next year.

The Syncrude Project is a joint venture of Canadian OilSands, Imperial Oil Ltd, Mocal Energy, Murphy Oil Corp, Nexen Inc, Sinopec Corp, and Suncor Energy Inc.

Concerns about shrinking returns from producing lightsynthetic crude were cited as part of the reason why Suncor,Canada's largest oil company, scrapped its partially-builtVoyager upgrading plant in northern Alberta earlier this year.

WHITING RELIEF

In recent years Canadian heavy crude prices have tended tosuffer more than synthetic grades in winter months as asphaltproduction drops off and refinery demand weakens.

Last winter Western Canada Select heavy blend traded around$40 per barrel below WTI, eating into producers' profits andprompting Alberta politicians to coin the term "bitumen bubble".

But although WCS touched lows around $33 per barrel belowthe benchmark earlier this month, and was last trading at $29.25per barrel below WTI, relief is in sight. It is expected torally once BP Plc completes a revamp of its 405,000 bpdWhiting, Indiana, refinery.

The $4-billion project has been beset with delays, promptingone trader to label it a "white whale", but once complete therefinery will more run heavy Canadian grades and less light.

"There are changing dynamics in how light and heavy aregoing to get taken up by the market," said Martin King, analystat FirstEnergy Capital.

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