Pipeline Reversal of Fortune
Don't think of it as crude oil prices rallying, think of it as Brent crude prices falling. Oil prices surge above $100 a barrel for the first time since last July as the "broken" global oil market gets fixed in a big way. Conoco Phillips had a big payday by selling its interest in Gulf Coast Seaway pipeline in Cushing, Okla. to Enbridge Corporation, which will reverse the flow of oil out of instead of into the NYMEX delivery point in Cushing. This is a big step to ending the bottleneck in Cushing and allow the bonanza of Canadian oil sands crude and shale crude to be sent to Gulf Coast refiners that have too often had to rely on foreign imports of crude.
Followers of crude imports realize the cost of imported crude was rising as evidenced by what became a record differential between the Brent Crude vs. West Texas Intermediate spread. West Texas Intermediate (WTI), which historically Brent Crude traded at a premium to, reversed on a host of challenges. In Oklahoma the influx of crude exceeded refiners’ ability, or at least desire, to run crude at those rates that would use the influx of new sources of oil. In the Gulf Coast where supplies were tight, the infrastructure did not exist to transport the oil in sufficient amount. The U.S. pipelines remain the most popular transport option, carrying about two-thirds of U.S. oil.
So instead of oil getting to refiners that needed it, it got backed up in storage in Cushing ,Okla. Oil supplies hit a record high in Oklahoma in April ahead of the Libyan conflict. Problems with North Sea production and the loss of Libyan crude oil created a tightness of supply of the light sweet crude. European refiners can only refine the higher quality blends and that set the stage for Brent crude trading at a record high against the WTI.
Now remember, before you get bent out of shape thinking that $100 a barrel WTI oil will mean higher gas prices. Think again. The truth is that while WTI is rising, remember Brent crude is falling. We are seeing a rebound in North Sea production and Libyan oil production is coming back on-line much faster than some of the more pessimistic traders predicted. If you remember last summer, the price of gasoline and products were going up as Brent crude increased. While the price of oil might rise at first because of declining supplies in Cushing, the easing of the Cushing bottleneck will lower prices for products. If U.S. refiners can get their hands on more Canadian and U.S. crude from shale production, the refining margins should improve and we should become less reliant on foreign imports. In other words, this reversal is a positive for the U.S. market and the anticipation of that positive situation has tightened the Brent/WTI spread to the tightest level in six months.
We saw a big drop in the price of heating oil as traders believe that the influx of crude will be released in the heart of heating season and ahead of the summer driving season. Reuters News said, "Conoco had been believed to be standing in the way of the Seaway reversal to protect its refining profits in the Midwest, but its decision to sell out put the line into play. Then came the apparent success of the Enbridge and Enterprise Products Partners' Wrangler pipeline proposal, an 800,000 bpd behemoth that seems to have garnered enough support to enter service by 2013. But now the schedule has moved up. With Seaway possibly entering limited reversed service by mid-2012, the risk that refinery maintenance periods will lead to a massive buildup of crude that will be difficult to run down in the summer has faded. Conoco, for its part, seems to have done very well. The major, which is breaking itself apart after a decade of deal making, will get $1.15 billion from Enbridge for its interest in Seaway, a huge sum for a humdrum logistics asset."
At the same time there are other plans to ease the congestion in the now suddenly over crowded U.S. pipeline system. New pipelines and rail lines are being built not only to ease the congestion in Cushing, but to move oil all over the country. The Energy Information Agency reported that figures from the Association of American Railroads (AAR) shows that tracks combined rail movements of oil and refined petroleum products rose in the first ten months of 2011 by nearly 300,000 tank cars, up 9.1% from the same period in 2010, which is much stronger than the 1.8% increase for all railroad cargo combined during the same period.
At the same time they report strong demand for tank cars in North Dakota because of the boom of shale gas production from the Bakken field. The Energy Information Agency (EIA) says that North Dakota oil production has soared from about 343,000 barrels per day (bbl/d) in January to a record high of about 464,000 bbl/d in September, sourcing North Dakota's Department of Minerals Resources.
Railroads are desperately trying to build track to keep up with the demand. The EIA says that the DMR expects North Dakota will pass California during the second quarter of next year to become the third biggest oil-producing state. Burlington Northern Santa Fe (BNSF) and other railway companies are building or expanding terminals and adding tank cars to transport North Dakota's growing oil supplies to Gulf Coast refineries. On Nov. 7, the first crude oil unit train on the Bakken Oil Express, a newly constructed rail hub near Dickinson, North Dakota, departed via the BNSF Railway carrying its first shipment, 70,000 barrels of crude oil destined for St. James, La. The Bakken Oil Express receives Bakken-area crude oil by both truck and pipeline and has a current takeaway capacity of 100,000 bbl/d. The Bakken Oil Express already is planning a second phase of construction that would significantly expand its takeaway capacity to more than 250,000 bbl/d.
Today in the oil patch we are focused on Europe once again!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com.