Canadian wildfire could limit oil supply to refiners

By Barani Krishnan

NEW YORK, May 9 (Reuters) -- Oil producers and refiners braced on Monday for a prolonged shutdown and possible supply constraints from Canada's vast oil sands region as a destructive wildfire raged for a second week.

Cooler and possible wetter weather looked to help firefighters battling the massive blaze as Canadian officials planned to take their first look at oil boom town Fort McMurray.

The town has been ravaged by the nation's most destructive wildfire in recent memory, with about half of the nation's oil sands capacity remained shut as energy firms kept facilities closed as a precaution.

Officials said resuming operations would be a challenge and no timeline had been considered.

"This production is not gone for good, yet when fires are controlled, restarting production will take several more weeks, even without damage," energy analysts at Morgan Stanley said in a note.

BP and other big oil firms warned on Friday they would not be able to deliver on some contracts.

Statoil and Husky Energy were among 11 production companies and three pipeline operators that have curbed activities after the inferno that began on May 1 forced more than 1 MMbbl of capacity offline.

The yard of CNOOC unit Nexen's facility in Long Lake, Alberta, suffered minor damage on Sunday from fire, officials said. It was the first reported damage to an energy industry asset since the crisis began.

Speculators' bullish bets on US crude futures were near July highs while bullish trades on global oil benchmark Brent were already near record highs. The scope for further gains was limited until there was more clarity on the extent of damage to oil facilities or supply outages. WTI crude was off 1.5%, while Brent fell 2.1%.

The market has risen about 75% since hitting 12-year lows of around $27 or lower in the first quarter, supported by falling US production, unexpected supply constraints in Libya and the Americas as well as a weaker dollar.

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

"It is likely that the market will over-react," said Jim Williams, an 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 US get damaged. Then you have a big problem."

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

Force majeure is an unforeseen event that prevents a party from fulfilling a contract. The notices were for the inability to deliver on some contracts for Canadian crude.

The United States imports about 3.5 MMbpd of Canadian crude, which is particularly important for US refiners from Ohio to the Dakotas.

World oil supplies remained in a glut, with an estimated oversupply of about 1.5 MMbpd.

Record US inventories and plentiful supplies in storage in western Canada will offset some of the losses from the blaze. But prolonged outages in the oil 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 critical locations in Edmonton and Hardisty, total inventories were 26.5 MMbbl 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."