Aug 6 (Reuters) - The Trans Mountain oil pipeline

expansion (TMX) was meant to shrink the discount on Canadian oil

versus U.S. crude but three months in the differential is wider

than when commercial operations on the project started.

Many analysts had forecast the differential on Western

Canada Select (WCS) versus U.S. crude would gradually narrow to

single digits thanks to the extra 590,000 barrels per day (bpd)

of export capacity offered by TMX.

But instead WCS for delivery in Hardisty, Alberta, is

trading around $15 a barrel below benchmark West Texas

Intermediate (WTI) oil, versus $11.75 a barrel under the U.S.

crude on May 1, the first day of commercial operations. WTI has

declined in recent weeks to less than $74 a barrel.

Oil companies in Canada, the world's fourth-largest crude

producer, have struggled for years with production outpacing the

space available on export pipelines, causing crude to get

bottlenecked in Alberta. TMX's start-up means Canada finally has

spare pipeline capacity, but the expected boost to prices has

not materialized.

On earnings calls last week, Cenovus Energy ( CVE ) and

Canadian Natural Resources Ltd ( CNQ ), both major shippers on

TMX, blamed a number of factors.

These include increased competition on the U.S. Gulf Coast

from Mexican heavy crude imports and U.S. refinery outages

including ExxonMobil's 251,800-bpd Joliet, Illinois, plant that

took most of its units offline after losing power following a

tornado last month and has not yet fully restarted.

Even so, company executives remained optimistic that the WCS

discount would start to narrow in coming months.

"Over the next little while I would say we expect Trans

Mountain to continue to have its intended impact in Alberta and

differentials to be as narrow as they have been in a long time,"

said Geoff Murray, executive vice-president of commercial at

Cenovus.

"The important thing around Trans Mountain is we've seen the

facility come online. It's up, it's operating and it's operating

well."

RBC Capital Markets analyst Greg Pardy said pipeline egress

out of western Canada appeared to be running smoothly.

"The main fly in the ointment may be elevated inventory

levels in select U.S. regions, but time will tell," he wrote in

a note to clients.

Weak demand from major sour crude consumer China was also

weighing on heavy oil grades globally, said Rory Johnston,

founder of the Commodity Context newsletter, adding that

expectations that expanding Trans Mountain would significantly

narrow WCS differentials had been overdone.

"The main value of TMX wasn't really a low WCS differential

but rather a vastly lower probability of another differential

blowout, which fingers crossed we still aren't going to see here

even if we're back above $15," Johnston said.

Prior to TMX's start-up, Canadian producers were vulnerable

to congestion on export pipelines occasionally triggering WCS

"blowouts" in which the discount plunged to more $40 a barrel

below U.S. crude, costing them millions of dollars in revenues.