Canadian Heavy Oil Falls as Alberta Crude-by-Rail Deal Nears

(Bloomberg) -- Canadian heavy oil prices have weakened ahead of an anticipated announcement that Alberta will ease production limits in exchange for shipping more crude by rail.

Western Canadian Select’s discount for November to futures widened 70 cents a barrel to $16.45 Tuesday, for the biggest differential since May, according to Net Energy Exchange.

Alberta’s government is preparing to announce the sale of crude-by-rail contracts later this month. As part of the sale, Alberta Premier Jason Kenney has said oil producers will probably be allowed to exceed their provincially imposed output caps if they can ship those extra barrels by train.

“There is a big motivation to increase rail use,” Tim Pickering, founder and chief investment officer of Auspice Capital Advisors in Calgary. “It’s underused.”

Alberta imposed production limits on the province’s largest producers at the start of this year after prices collapsed amid a supply glut. Oil producers including Suncor Energy Inc. and Cenovus Energy Inc. have suggested that limits could be raised for producers that agree to ship those extra barrels on rail cars. To encourage further rail shipments that would reduce inventories, heavy crude’s discount to the U.S. benchmark would need to widen to about $20 a barrel, Rory Johnston, commodity economist at Scotiabank, said in August.

Originally, Alberta’s production limits were to be phased out by year-end but the government in August extended them into next year while raising the volume of oil that’s already exempted from the first 10,000 barrels a day of production to 20,000 barrels a day. The limit has also gradually been increased to to 3.8 million barrels a day in November and 3.81 million barrels a day in December versus 3.56 million barrels a day in January.

To contact the reporters on this story: Robert Tuttle in Calgary at rtuttle@bloomberg.net;Sheela Tobben in New York at vtobben@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Catherine Traywick, Jessica Summers

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