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As Canada blaze grows, fears about crude supplies deepen, prices rally

By Barani Krishnan
As Canada blaze grows, fears about crude supplies deepen, prices rally

By Barani Krishnan

NEW YORK (Reuters) - Oil producers and refiners braced on Monday for further supply constraints from the wildfires that have shut one half of Canada's vast oil sands capacity and forced BP and other big oil firms to warn they would not be able to deliver on some contracts.

While Sunday's cooler weather, light rain and favourable winds helped control the advance of the blaze that razed neighbourhoods in Alberta's oil sands boomtown, Fort McMurray, regional energy firms continued to shut facilities as a precaution, sending futures prices up 2 percent in early trading.

Statoil and Husky were the latest to do so, after cutting output earlier at their regional facilities. They are among 11 production firms and three pipeline operators that have curbed activities after the week-long inferno forced more than 1 million barrels in capacity offline.

Fire also caused minor damage on Sunday at the yard of CNOOC <0883.HK> unit Nexen's facility in Long Lake, Alberta, officials said. It was the first reported damage to an energy industry asset since the crisis began.

Oil prices rose 2 percent in Asian trade, with Brent rising above $46 a barrel and U.S. crude hovering at over $45. The market has risen about 75 percent since hitting 12-year lows of around $27 or lower in the first quarter, supported by falling U.S. production, unexpected supply constraints in Libya and the Americas - among others - and a weaker dollar. [O/R]

"I'm not sure if we'll get back to $80 a barrel, but $50 and above looks likely," said Carl Larry, director of business development for oil and gas at Frost & Sullivan.

Last week, Canadian crude futures rallied to their highest in months from production cuts.

"It is likely that the market will overreact," said Jim Williams, analyst at WTRG Economics in London, Arkansas. "My worry is if the upgrader facilities that push out the bulk of the heavy Canadian crude to the U.S. get damaged. Then you have a big problem."

On Friday, BP Plc , which produces oil in Canada via a partnership with Husky, along with Suncor Energy , the largest Canadian oil producer, and U.S. refiner Phillips 66 issued warnings of "force majeure" events.

A force majeure event is an unforeseen event that prevents a party from fulfilling a contract.

In that case, the notices were for inability to deliver on some contracts for Canadian crude.

The United States imports about 3.5 million barrels a day of Canadian crude, which is particularly important for refiners in the U.S. Midwest ranging from Ohio to the Dakotas.

World oil supply remains in a glut, with an estimated oversupply of around 1.5 million bpd.

Record U.S. inventories and plentiful supplies in storage in Western Canada will also offset some of the loss from the blaze. But prolonged outages in the oils sands, which has the world's third-largest crude reserves, could roil producers and traders' contracts and order books.

According to Genscape, which monitors key crude storage terminals in Western Canada, including the critical locations at Edmonton and Hardisty, total inventories were 26.5 million barrels at the end of April, equivalent to less than a month of output currently offline.

"We are going to see this impacting flows, not necessarily right away but over the next few weeks," said Matt Smith, who tracks crude cargoes for New York-based Clipper Data. "An outage of this volume is going to have a supportive influence on the market."

(Additional reporting by Allison Martell in Toronto; Editing by Peter Cooney)