TransCanada delays restart of Keystone oil line serving Illinois refinery

By Catherine Ngai and Liz Hampton

NEW YORK/HOUSTON, April 6 (Reuters) -- The sudden closure and subsequent delay in restarting the Keystone crude pipeline has caused traders to sell off heavy Canadian oil for immediate delivery, trading sources said on Wednesday, while temporarily lending support to US futures markets.

TransCanada delayed the restart of its 590,000-bpd Keystone crude pipeline to next Tuesday at the earliest from Friday originally, four traders familiar with the matter said on Wednesday.

The line, which delivers crude from Hardisty, Alberta to Cushing, Oklahoma, and on to Illinois, was shut over the weekend after a potential leak. TransCanada had told shippers on Tuesday the pipeline would restart by next Tuesday at the earliest, trade sources said.

A TransCanada spokesman confirmed in an email that the company had informed customers during a subsequent call on Wednesday afternoon that next Tuesday remained the best-case scenario for a restart.

"Quick fix is not how we would characterize this, at all," TransCanada spokesman Mark Cooper said, adding that the company has made "significant progress" in pinpointing the source of the problem in a safe manner.

He said the company would like the pipeline to be operational as quickly as possible, but is focusing on doing so safely and with regulatory support.

TransCanada also said it was going to ask the Pipeline Hazardous Materials Safety Administration (PHMSA) to repressurize the line in order to find the leak, a source said, a move which could potentially expedite its restart.

A spokesman for PHMSA said it was still monitoring the situation and that the oil spilled is Surmont heavy-blend crude.

In a shipper notice, TransCanada also said it was curtailing shipments on its pipeline by 35% for the remainder of April.

The outage, which stemmed the flow of Canadian crude further south, caused cash prices to dive to a two-month low below the West Texas Intermediate benchmark.

Time spreads in US crude futures contracts rallied late Tuesday following news of the delay, with May WTI trading as tightly as 98 cents/bbl below June WTI, up from a $1.46/bbl discount earlier in the day.

News of an extended delay also boosted futures prices, as traders pointed out that it would divert crude otherwise moving toward Cushing, Oklahoma, delivery point of the contract.

The outage has forced refiner Phillips 66 to cut run rates and shut units at its 306,000-bpd Wood River refinery.