Canadian oil has clawed back some of last week's deep discounts that were blamed on export pipeline congestion and refinery fires, but shares of many of the producers remain weak as investors worry about another extended clearance sale in crude.
"There's definitely a sense of malaise, a sense of, 'Here we go again,'" said Samir Kayande, analyst at ITG Investment Research.
The spread between U.S. benchmark light oil and Canadian heavy crude has narrowed by more than 12 per cent from last week. Part of that was due to a report on Tuesday that a refinery in the Chicago area run by Citgo Petroleum Corp., a big buyer of Canadian oil, was restarting processing units following a fire in late October.
However, the Toronto Stock Exchange's energy group is off by nearly 4 per cent since the start of this month, with investors frightened about risks of a return to months of heavy discounting that hit Canadian crude in late 2012 and early 2013.
"It seems like when oil prices were going down, oil stocks in general kept going up," said Luc Mageau, analyst at Raymond James. "Now it's like the steam is out and stock prices are coming off in the face of differentials starting to narrow a little bit. It's been almost an inverse relationship."
Western Canada Select (WCS) heavy blend oil sold for $36.75 (U.S.) a barrel under U.S. benchmark West Texas Intermediate (WTI) crude on Tuesday, according to oil broker Net Energy Inc. That compares with a spread of as much as $42 a barrel last week.
Today's discount puts the price of a barrel of Canadian heavy oil at around $56.32 a barrel.
The Canadian crude market has been highly volatile. In the summer, WCS sold at times for around $15 a barrel under WTI.
The chief reason for the volatility is shrinking excess transport capacity as oil production climbs and pipeline projects plod through regulatory processes, forcing shippers to compete for the limited space to major markets. That has eased somewhat this year with a vast increase in the use of trains to carry oil.
Heavy crude prices also tend to weaken as winter approaches because demand for asphalt tails off.
"But this is going to be a problem until pipelines are built," Mr. Kayande said.
Eleven months ago, Alberta Premier Alison Redford warned of a "bitumen bubble" – heavy crude lingering at $40 a barrel under WTI. She said that stood to cut projected revenues to the province by $6-billion in 2013. By late winter, however, WCS prices began to improve to levels of around $15 a barrel by the middle of the year.
Ms. Redford travelled to Washington this week in her latest quest to help persuade U.S. officials to approve TransCanada Corp.'s contentious Keystone XL pipeline to the southern U.S. from Alberta. The project is years behind schedule amid environmental opposition.
"If you look at the chart, it's almost like a mirror image to what happened last year. October hit, and your diffs [discounts] went from $18 down to $40 over the course of a few weeks," Mr. Mageau said. "It's exactly what happened in this go-around as well. Now, this time it's been accelerated by a couple of refinery outages and apportionment with the crude lines."
Enbridge Inc., which runs the main system for moving oil to the U.S. Midwest and points beyond, took the relatively rare step of applying tighter rationing for November on the network beyond what is normally set in the final days of the month.
Canadian crude is generally traded for the first three weeks of any month for delivery the following month. Once the business is done, shippers submit their nominations for capacity to the pipeline company, which calculated how much of the nominated volume can move.
Among oil producers, Suncor Energy Inc. is down 3.7 per cent so far this month, Baytex Energy Corp. is down 4.6 per cent and Cenovus Energy Inc. is down 3 per cent.