Canadian heavy crude prices extended gains to reach five-month highs on Monday, helped by concerns about harsh weather affecting oil sands production in northern Alberta.
Oil sands projects are designed to cope with extreme cold but recent temperature swings have prompted some traders to bet that production could slow down.
Some market players also said the market is anticipating increased demand from BP Plc's 405,000 bpd Whiting, Indiana, refinery after a revamp last year.
Western Canada Select heavy blend for February delivery last traded at $19.00 per barrel below the West Texas Intermediate benchmark, according to Shorcan Energy brokers.
That was the narrowest differential since late July and compares with a settlement price of $20.00 per barrel below the benchmark on Friday.
Canadian heavy crude prices have rallied steadily since slipping to $41.50 per barrel below WTI in early November.
"The restart of Whiting refinery is starting to have some impact," said Martin King, analyst at FirstEnergy Capital in Calgary. "Overall we are seeing a better clean-up of excess volumes (in the market)."
The Whiting refinery upgrade will increase its Canadian crude processing capacity to 350,000 bpd from 85,000 bpd. BP has said it expects to begin ramping up Canadian crude processing from year-end 2013 through the first quarter of 2014.
Light synthetic crude from the oil sands for February delivery also climbed to a four-month high of $2.75 per barrel above WTI, up from Friday's settlement price of $2.50 per barrel above the benchmark.
Syncrude's oil sands operations in northern Alberta produced an average of 291,300 barrels per day of synthetic crude in December, 10 percent less than the previous month, according to Canadian Oil Sands Ltd COS.TO, the project's largest-interest owner.
COS spokeswoman Siren Fisekci said the project had experienced some unplanned downtime in the upgrader, which converts raw bitumen into refinery-ready synthetic crude.
The risk of supply issues offset the impact of reduced demand from the 130,000 bpd Co-op refinery in Regina, Saskatchewan, which is running at half capacity since an explosion on Dec. 24.