By Rod Nickel
WINNIPEG, Manitoba, Feb 16 (Reuters) - Canadian heavy crude rallied to a two-month high relative to U.S. crude this week, offering some relief to oil producers in Alberta struggling with thin margins amid plentiful supply.
The rally was likely to be short-lived, traders and analysts said, because output continues to grow without a corresponding increase in transportation capacity.
Canada's crude typically trades at a discount to U.S. benchmark West Texas Intermediate (WTI) light oil, reflecting transportation costs to U.S. refineries and additional processing requirements.
The discount expanded since a November leak in TransCanada Corp 's TRP.TO Keystone pipeline, which led to a temporary shutdown and a buildup in supplies.
TransCanada is now operating the line at reduced pressure. Canadian producers have been unable to boost volumes by rail much, as railways are reluctant to take more oil business when they are busy shipping grain.
The bottlenecks come as oil sands production expands with Suncor Energy Inc's SU.TO new Fort Hills mine.
Western Canada Select oil traded $20.50 per barrel below WTI on Tuesday, the smallest since Dec. 7, and well off a four-year high of $32 on Jan. 31, according to Shorcan Energy Brokers.
But the correction looks temporary, and the discount has started to expand again, said Tudor Pickering Holt & Co analyst Matt Murphy.
The price rally was connected to monthly apportionments by Enbridge Inc ENB.TO , which operates the biggest Canadian oil pipeline system and rations space when capacity is tight, Murphy said. Oil companies typically request more capacity than they need to ensure they get enough, resulting in some needing to buy additional barrels on the market, he said.
The start up of Alberta's Sturgeon Refinery has also increased heavy oil demand, said a Calgary-based trader, who was not authorized to speak publicly.
Enbridge on Thursday said it was rationing space as much as 51 percent on some Mainline pipelines for March, more than the previous month, reflecting tight capacity. has changed fundamentally, said GMP Energy analyst Michael Dunn.
"Structurally, with Keystone restricted and the growing (heavy oil) output, and inventories being full, there doesn't seem to be a physical relief valve that's being blown yet," Dunn said.
Cenovus Energy CVE.TO sees prices strengthening once TransCanada restores pressure on Keystone and railway volumes increase, said CEO Alex Pourbaix.
"In the short term, we have an acute challenge that is largely to do with what we suspect is a fairly small imbalance in supply and takeaway capacity," Pourbaix said on a Thursday conference call.