* Graphic on WCS contango structure http://link.reuters.com/pus45w
By Nia Williams
CALGARY, Alberta, Aug 20 (Reuters) - The U.S. oil glut is
about to repeat itself north of the border in Canada, raising
prospects that the world's cheapest oil may be set to get even
cheaper.
Oil traders are scrambling to secure more storage space in
western Canada as crude stockpiles in the region surge to record
highs and rental rates in the normally sleepy spot market jump.
Meanwhile, an outage at a major U.S. refinery that has weakened
demand for crude from the region is likely to put further
pressure on tank space.
Such a trend is worrisome ahead of fall refinery maintenance
when a big portion of capacity in the U.S. Midwest, known as
PADD 2, is taken offline, as tanks there are also filling up
fast, experts said.
At first, traders in the niche Canadian oil sands and heavy
crude market appeared to be taking a page from the U.S. playbook
on how to profit in a slump by storing crude in the hope of
reselling it at a profit at a later date, or by simply locking
gains via paper trading.
As the outright spot price of Western Canada Select (WCS), a
marker for heavy, diluted bitumen from Alberta's oil sands sank
to a 12-year low near $20 per barrel, the differential on WCS to
U.S. crude hit its widest level since last August.
The front-month WCS differential moved to a discount to the
forward market for the first time this year in a structure known
as a contango, making it profitable to store crude in
anticipation of a pick-up next year.
Inventories in western Canada hit around 26 million barrels
two weeks ago, the highest ever recorded by energy information
provider Genscape, which has been monitoring storage in the
region since 2011. That's up from eight-month lows just two
months ago of around 18 million barrels after wildfires in
northern Alberta shut some oil sands production.
In the week ended Aug. 14, stocks drew by 1.5 million
barrels but held within sight of the record high and stood at
around 53 percent of the 46 million barrel storage capacity
monitored by Genscape in Western Canada.
Unlike the main U.S. oil storage hub of Cushing, Oklahoma,
where much of the 85 million barrels of capacity is available
for short- or medium-term leases, Western Canadian storage is
typically locked up in long-term deals.
For producers such as Suncor Energy Inc SU.TO and Cenovus
Energy Inc CVE.TO , which have watched their margins erode as
regional crude prices halved over the past two months to 12-year
lows, the trend could signal more pain ahead.
A glut of crude in Alberta will likely sell at an even
steeper discount to global prices, traders say.
Storage is tightening in PADD 2 where stocks are at a 139.5
million barrels, or 70 percent of capacity, according to the
U.S. Energy Information Administration.
"We will be seeing a lot more barrels being sold up in
Edmonton and Hardisty and that's tightening the storage market
up there," Dominic Haywood, an analyst with Energy Aspects said.
He expects 660,000 bpd of crude refining output, equivalent
to 4 percent of North American capacity, to be out in October.
JUMP IN LEASE RATES
The flurry of activity is a boon for tank owners such as
Kinder Morgan Inc (NYSE:KMI) KMI.N and TransCanada Corp TRP.TO , which
have built storage in western Canada in a bet on growing oil
sands production even with such low prices.
The spread between front-month WCS delivered in September
SHRWCSMU5 and December flipped into contango in mid-July and blew out to more than $4 a barrel last week.
For market players with access to contracted storage, which
ranges from 75 cents to $1.50 a barrel, that meant they could
turn a neat profit by buying September barrels for around $20
below benchmark crude and selling them for a narrower discount
of $15.45 a barrel in December.
Spot lease rates, meanwhile, have jumped to $3 a barrel and
higher in the Alberta marketing hubs of Edmonton and Hardisty,
according to two trading sources. One source said that was the
highest since 2012.
With BP Plc's BP.L Whiting, Indiana, refinery outage and
extra apportionment rationing space on Enbridge Inc ENB.TO
pipelines, inventories are likely to fill fast in Alberta and
Saskatchewan, traders said.
Whiting, one of the biggest consumers of Canadian crude,
will be running at 40 percent capacity for at least a month.
"Recently it (the storage rate) has gone through the roof,"
said one Calgary-based trader.