CALGARY Alberta (Reuters) - Spot crude-by-rail volumes are down in Canada as traders and marketers including Glencore PLC (GLEN.L) are deterred by stronger heavy oil prices that have erased arbitrage opportunities to ship cheap crude from landlocked Alberta to higher-priced U.S. markets, industry sources said.
Since early August, heavy Canadian crude's discount to U.S. futures has narrowed to about half of what it was last year, barely covering rail shipping costs, mainly due to extra demand to fill Enbridge Inc's (ENB.TO) new pipeline to flow the Canadian glut to U.S. Gulf Coast refining hub.
The international commodities group Glencore no longer ships Canadian crude by rail, one industry source said. A Glencore spokesman declined to comment.
A senior executive at a Canadian crude-by-rail loading operator said his company is loading about 90 percent of volumes under long-term contracts versus 10 percent short-term contracts, defined as less than three months. He said it is usually a 70/30 split.
Midstream companies like Gibsons Energy Inc (GEI.TO) are also moving more crude under long-term contracts. Strobel Starostka Transfer Canada Ltd said its loading sites in Alberta were operating below capacity after marketers pulled back from spot transactions.
That is not to say crude-by-rail is in decline. Western Canadian rail uploading capacity for crude oil is expected to exceed 1 million barrels per day by the end of 2015, according to the Canadian Association of Petroleum Producers.
Canada exported 163,000 bpd in the second quarter of 2014, National Energy Board data showed, and two major crude-by-rail terminals have come online since then.
These oil sands giants can afford to lose a few bucks on transport costs when the alternative is shutting in production or leaving crude stranded in Alberta.
"The traders have been somewhat chased out of it," said Travis Brock, an executive at Strobel Starostka. "The producers have a long view. Even if it's not the best netback, they have made commitments to move some (crude) by rail and they will continue to do that."
Nimble marketing shops like Elbow River Marketing, a subsidiary of Parkland Fuel Corp (PKI.TO), were among the first to spot opportunities to ship cheap crude to the U.S. markets.
Global traders like Glencore and Trafigura AG [TRAFGF.UL]followed suit.
The price their barrels commanded in the United States more than covered the $13 to $21 per barrel cost of loading crude onto rail cars and shipping it across the continent.
But with Western Canadian Select heavy blend trading at a discount of $13 per barrel to West Texas Intermediate crude futures CLc1, compared with $30 or $40 per barrel at times last year, that arbitrage opportunity has disappeared.
As a rule of thumb, traders in Calgary say WCS should trade $15-$20 per barrel below WTI to be worth railing to the U.S. Gulf Coast, where it competes with Maya, a Mexican blend of similar quality.
"As these spreads contract, the ability to do arbitrage on a spot basis does narrow," said Tom McMillan, director of corporate communications at Parkland Fuel. He declined to comment on Parkland's operations.
Strobel Starostka is moving eight tank cars a day, roughly 4,200 bpd, from what could be a 40 car-per-day or 21,000 bpd facility in Lethbridge, Alberta, because marketers have backed away, Marvin Trimble, director of commercial development said.
Not all trading houses are retreating, however. A Trafigura spokeswoman said their participation in Canada and the United States had not changed substantially.
As oil sands production booms, Canadian producers have rushed to embrace crude-by-rail as an alternative to congested export pipelines. Many spending to secure their own long-term tank car leases and loading facilities.
The big producers favor unit trains terminals, which can ship up to 60,0000 barrels of crude in one go, and offer better economics than mixed cargo manifest trains.
Strobel Starostka plans to build three unit train terminals to tap into demand. At Gibsons' new 140,000 bpd Hardisty terminal, operated in partnership with U.S. Development Group, shippers have signed take-or-pay contracts of at least five years.
Even though current spreads do not cover the cost of shipping crude by unit train to the Gulf Coast, when pipelines are full it may be the only way to get crude to market.
By alleviating crude bottlenecks in Alberta, rail helps prop up prices. Larger oil sands players still send the majority of production to market via pipeline, and use rail as a hedge.
"For producers, if rail sucks, it means everything else they have got going down is making money," said a midstream source.
Editing by Amran Abocar and Marguerita Choy