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Canadian oil producers, facing delays on new export pipelines, are poised to reap higher prices in Europe and Asia as growing rail deliveries to the U.S. are sent overseas, according to FirstEnergy Capital Corp.

In two years, 600,000 barrels a day of Canadian oil sent to the U.S may be re-exported to other destinations, up from 25,000 barrels now, Martin King, a commodities analyst at FirstEnergy in Calgary, said in a presentation today. The re-exports are the best way for rising Canadian light and heavy crude output to approach world prices right now, he said. Growing rail shipments and more U.S. pipeline space will lift Canadian supplies to the Gulf Coast, he said.

Producers are boosting shipments of foreign crude from the world’s largest refining center as Canada pumps record amounts of oil amid delays to pipelines including Enbridge Inc. (ENB)’s Northern Gateway to the Pacific and TransCanada Corp. (TRP)’s Energy East to the Atlantic. U.S. oil output at the highest in 28 years is also expanding supplies to the Gulf Coast, prompting a debate about whether to allow U.S. exports off the continent.

“This is a huge market opportunity with the expansion of crude by rail,” King said, adding that re-exports can relieve a potential build-up of supplies in the Gulf Coast as U.S. production also rises. “The re-export option can do a lot to keep the market balanced.”

Suncor Energy Inc. (SU), the largest Canadian energy company by market value, is among producers seeking new markets outside North America for the world’s third-largest reserves of crude in Alberta’s oil sands. Suncor loaded its first tanker of heavy Canadian crude from Eastern Canada last month for shipment across the Atlantic.

Export Restrictions

The U.S. restricts most exports of unrefined crude except to Canada, and allows shipments of foreign oil from its ports that hasn’t been commingled with domestic volumes. The Commerce Department granted 86 of these re-export licenses from October through August. Shipments have been reported to Switzerland, Spain, Singapore and Italy this year, according to the U.S. Energy Information Administration.

It’s unlikely the U.S. will allow exports of its own crude until 2017 or 2018, after President Barack Obama is out of office, King said.

Oil-sands producers facing pipeline bottlenecks have helped narrow a price discount for Canadian heavy crude relative to the main U.S. benchmark to $12.85 a barrel today, from a record of $42.50 in late 2012, by turning to trains. Rail shipments of Canadian crude to the U.S. rose 10-fold to about 163,000 barrels a day by the end of June from the beginning of 2012, according to Canada’s National Energy Board.

Alberta Discount

Western Canadian Select in Hardisty, Alberta, is priced at around $6.78 a barrel less than Mexican Maya, a similar heavy, high-sulfur crude grade found in abundance on the Gulf Coast. The cheapest transportation from Alberta to the Gulf Coast, via pipeline, costs at least $8 a barrel for committed shippers.

Mixed light, low-sulfur crude in Edmonton is about $9.60 a barrel cheaper than Brent, the international benchmark for such grades. The cheapest pipeline route for such crude from Alberta to the Gulf Coast is $7 a barrel. Syncrude, another light, low-sulfur oil in Edmonton made synthetically from oil sands bitumen, is $3.85 a barrel cheaper than Brent.

Once Canadian crude gets to the Gulf Coast, it might redirect waterborne imports to other parts of the world instead of being re-exported, said Andy Lipow, president of Lipow Oil Associates LLC in Houston. The Gulf Coast imported 4.2 million barrels of crude a day by tanker last week, most of which is heavy oil.

“Most of the increase in production is going to be WCS-type barrels, which is what refiners on the Gulf Coast want,” Lipow said. “The first thing that increased Canadian production would compete with is Mexican and Venezuelan crude, which can go elsewhere.”
Source: Bloomberg

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