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Alberta Finance Minister Doug Horner expects the ‘bitumen bubble’ to return.

JASON FRANSON/THE CANADIAN PRESS

Alberta Finance Minister Doug Horner said in his fiscal update this week that the spread between Canadian and global prices for oil has taken a holiday. But he warned that, "like a bad penny," he expects it will return.

Analysts say the spread – usually expressed as the difference between lower-valued Canadian heavy oil and the North American benchmark West Texas intermediate (WTI) – will remain volatile into the near future. But it should soothe the nerves of Alberta officials that analysts don't expect the differential to be as wide in the months ahead as it was last winter, when it jumped to more than $40 (U.S.) a barrel of oil.

This week, Western Canadian Select (WCS) futures contracts were trading at a $24 differential to WTI. Paul Ferley, assistant chief economist for RBC Economics, said the differential is simply "a function of being able to move product or not," and how resourceful Canada's oil sands and conventional oil industry are at finding innovative means to transport crude.

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A greater focus on the differential stems from pipeline congestion that has made it increasingly difficult to export Canada's heavy oil. Last winter, Alberta producers received a more heavily discounted price for their crude. The situation eased somewhat this spring, but then in mid-June, began to worsen again.

Analysts at Calgary-based Peters & Co. Ltd. said they don't believe Canadian pricing differentials will again approach the "widened levels that were experienced earlier this year for any sustained period of time."

The investment firm's recent crude-oil outlook said that, while there are still numerous roadblocks to exporting, the combination of rail and possible new pipelines – including but not limited to the controversial Keystone XL project – "represent reasons for optimism." However, it warned the system it going to remain tight and congested, and any disruptions are going to have an effect. The report notes that it is difficult to determine the extent of the backlog for deliveries of heated rail cars needed for heavy oil transport and the timing of BP's coker modernization project in Indiana is unclear.

Charles St-Arnaud, an analyst at Nomura Securities International Inc., also said the oil differential is unlikely to be as bad as last winter. He said the Seaway pipeline linking Cushing, Okla., to the refineries on the Gulf of Mexico will remove some of the excess oil, and the eventual start-up of the Whiting refinery will also increase demand for oil.

But analysts suggest there may be a crude-by-rail chill related to July's Lac-Mégantic, Que., train derailment and explosion, a disaster that killed 47 people and shook Canadian confidence in the safety of rail transport.

A separate Peters & Co. report on crude-by-rail activity said that, while rail is likely to play an increasing role in transporting Western Canadian crude, "from a cost perspective, and arguably from a safety and environmental perspective given the recent events in Quebec, we believe that rail is in many ways a suboptimal solution relative to the numerous proposed pipeline projects."

Royal Bank of Canada analyst Walter Spracklin said that so far, the third quarter of 2013 has shown a 3.7-per-cent drop in Canadian petroleum products transported by rail, compared with a year earlier.

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Mr. St-Arnaud, a New York-based analyst, said recent declines in oil by rail transport – which he suggested could be linked to the Quebec disaster – could recreate some of the conditions that led to the wider Canadian oil spread last November and December.

He said the spread between WTI and Western Canadian Select could gradually increase toward $30 a barrel "if transportation by rail continues to decline, and if production in Canada continues to increase."

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