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Canadian light-heavy oil price spread at widest ever - Weak demand for asphalt

Oct, 22 2000

Canadian light-heavy oil price spread at widest ever
By Jeffrey Jones

CALGARY, Oct 19 (Reuters) - The spread between Canadian light and heavy oil prices has ballooned to its widest ever after a summer of rising supply and weak demand for asphalt, the tar-like crude's main product.

Analysts on Thursday attributed the huge discount on heavy oil -- Canada's fasted-growing grade of crude -- to reduced seasonal demand in the key U.S. Midwest refining market as well as fears that a host of new development projects in western Canada could lead to a glut similar to the last one in 1997.

Canadian heavy oil production this year is already projected to be 6.9 percent higher than in 1999.

In its latest posting of oil prices, Imperial Oil Ltd. (Toronto:IMO.TO - news), Canada's top refiner, set a price of C$52.15 ($34.54) a barrel of light sweet crude at Edmonton and C$31.64 a barrel for medium-heavy Bow River oil at Hardisty, Alberta, resulting in a difference of C$20.51 ($13.58).

That is more than quadruple the price spread of a year ago and double that of mid-September. Despite the steep discount to light crude, however, the absolute heavy-oil price is still higher than last October, a function of surging world markets.

''It's definitely a whole lot wider than we've ever seen it, but these are still pretty good prices for heavy oil,'' said Brian Prokop, analyst with brokerage Peters & Co. Ltd.

Heavy oil typically trades at a discount to light crude because it requires more extensive refining to process it into petroleum products like gasoline and heating oil. Oil companies watch the spread closely when planning heavy-oil development projects, which can be expensive because they often employ technology to increase the gooey crude's ability to flow.

''The high level of pricing generally for crudes allows more flexibility on the differential -- it can get quite wide and you still have a reasonably high heavy crude price,'' said Steve Kelly, a market analyst with consultants Purvin & Gertz. ''But basically, we're out of the asphalt season and it turned out to be a bit of a bust this year in terms of the paving activity in the U.S.''

Kelly said he believed major asphalt refiners were eschewing heavy crude as they managed their inventories for the winter months.

In addition, major producers, such as PanCanadian Petroleum Ltd. (Toronto:PCP.TO - news), Canadian Natural Resources Ltd. (Toronto:CNQ.TO - news) and Alberta Energy Co. Ltd. (Toronto:AEC.TO - news), have kick-started heavy oil projects put on the shelf when oil prices crashed in 1998 and 1999, he said.

Canada's Natural Energy Board has forecast overall Canadian crude production to average more than 2.2 million barrels a day this year, with heavy oil, not including bitumen, accounting for 556,911 barrels a day, or about 25.2 percent.

In 1999, total oil output was 2.1 million barrels a day, with heavy making up 521,103 barrels a day, or 24.7 percent.

''We do have more heavy oil production than we've ever had before,'' Prokop said. ''We've also had net increases in oil sands production, bitumen production and diluent production. The only thing that's actually gone down is conventional (light oil).''

Analysts predicted the price spread would narrow again once world oil markets slipped from today's lofty levels, which recently rose close to 10-year highs amid fears of a winter supply squeeze.

''What I'm looking for first is a decline in the overall price of crude which would I think tend to stabilise the differential and probably bring it in somewhat,'' Kelly said.

($1 equals $1.52)

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