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Why This Oil Price Rally Has A Limit

Why This Oil Price Rally Has A Limit

While oil markets are tightening…

Canadian Crude Surges on Enbridge Pipeline Allocation Decision

Pipeline pieces

Canadian crude oil surged by $12.20 a barrel after Enbridge, the country’s biggest oil export pipeline operator said it will not make oil producers stick to crude allocation limits for a key pipeline carrying Canadian heavy crude to U.S. refineries.

The company had last month told oil producers that beginning in July that they would have the right to allocations based on a 12-month rolling average plus an additional 15 percent for heavy crude and 40 percent for light crude, but for any volumes above that they would have to present physical proof that they have the volumes, Bloomberg reports.

However, after discussions with producers, Enbridge decided to drop the new rule and leave producers to reserve as much pipeline capacity on the mainline as they wish.

"Enbridge’s mainline system continues to be oversubscribed. We have been engaged with our customers to improve the nomination process and will continue to work directly with them on this issue," the company said in a statement.

The price rise following Enbridge’s decision is the highest ever and comes at just the right time as Canadian heavy crude trades at a discount of more than US$35 a barrel to West Texas Intermediate.

Related: Geopolitical Tensions Rise As Iran-Iraq Oil Swap Begins

The main reason for the discount is pipeline capacity bottlenecks as Alberta producers continue to increase production from the oil sands, with no new pipelines being built. The reasons for this range from environmental concerns to economic non-viability as most forecasts see Canadian crude production plateauing and beginning to decline in the not too distant future, leaving new pipeline capacity stranded.

Canada produced a record 5.2 million barrels of crude daily in March, according to International Energy Agency estimates from last month, but was likely to have declined substantially in the following two months due to maintenance and the steep discount to WTI.

By Irina Slav for Oilprice.com

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