CALGARY-The difference between North American and European oil prices climbed to widest level ever on Monday, raising questions about Canada's reliance on a single market for the vast majority of its oil exports.

London-traded Brent rose to the highest in two years, briefly topping $104 before closing at $103.08 US a barrel, while New York-traded West Texas Intermediate (WTI) crude fell to the lowest point of 2011, losing 77 cents to finish the day at $84.81.

The difference - $18.27 - represents the widest gap between the two ever recorded. In 2010, the differential between the two was less than a dollar.

Analysts attributed the growing disconnect to continued unrest in the Middle East as protests spilled over from Egypt in other countries including OPEC member Iran and Bahrain, a key transit point for Saudi Arabian production.

"The prospect of regional contagion impacting a key oil supplier appears elevated," JP Morgan Chase said in a research note, suggesting oil prices are "cheap" given the prospect for increased market volatility.

In marked contrast, traders blamed bulging storage inventories at the main trading hub in Cushing, Okla. for pushing North American prices to the lowest point of 2011.

"It's a huge opportunity cost" for western Canadian energy producers, Scotiabank commodities analyst Patricia Mohr said in an interview. "Oil prices are being driven by geopolitical factors but we're not getting the benefit. In my view it's challenge for Western Canada's oilpatch because we have limited export capacity to markets other than the United States."

Scotiabank's Mohr said the situation underscores the need for an alternate outlet to the West Coast. Both Enbridge Inc. and Kinder Morgan have put forward proposals to ship oil through Kitimat and Vancouver, respectively. "The reason WTI is not responding to world market signals is that it's trapped in that market."

According to Bloomberg, stockpiles at Cushing, the delivery point for the New York Mercantile Exchange contract, rose to a record 38.3 million barrels at the end of January, prompting shippers to put oil on trucks and rail cars for deliveries to the Gulf of Mexico.

In a separate report, Raymond James predicted that North American prices would lag global benchmarks well into 2012 due to transportation bottlenecks on the North American pipeline network.

FirstEnergy commodities analyst Martin King said Canadian producers could be facing discounts of $30 to $40 per barrel to Brent depending on the type of oil they produce. The "meltdown" in U.S. pricing comes at a time when Canadian oil flows are increasing as pipeline operators like Enbridge work through maintenance issues on its American system that have reduced exports since last summer. Likewise, TransCanada Corp. began the first commercial deliveries to Cushing off the Keystone pipeline on Feb. 8.

King estimated it could take "weeks or months" for the supply overhang in the U.S. to come down and bring markets back into balance.

"It's never a good thing if you're shipping into an oversupplied market," he said. "You're taking some pretty big hits per barrel if you're taking a differential to (W) TI which itself is taking a huge differential to Brent."

Although most Canadian crude is priced according to American benchmarks, some Newfoundland production receives Brent pricing. Also, companies like Nexen, Suncor, Canadian Natural Resources and Talisman Energy have North Sea and West African production that fetches the higher European price.

Suncor's shares jumped three per cent or $1.36 on Monday to $41.61, near a 52-week high. Likewise, CNRL added $1.18 to $44.38 while Nexen climbed 83 cents to $22.85.

But Walter Zimmermann Jr., the chief technical analyst for United Icap in New York, said social unrest has become a convenient cover for speculative traders to "squeeze" the Brent contract. He noted oil prices remained stable through periods of social upheaval including the original revolution in OPEC member Iran and successive Middle Eastern wars.

He said the gap between WTI and Brent is "ludicrous," although "there's no indication that it can't head higher."

"The situation that for 20 years we've had periods of massive social unrest and the spread between WTI and Brent never budged. We chalk it up completely 100 per cent to financial volatility."

With files from Bloomberg

spolczer@calgaryherald.com