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.