Oil at $60 or $120 doesn’t prevent U.S. supplanting Saudis

Shrinking Spread

Analysts estimate WTI will rise more than Brent in coming years partly because of the way oil pipelines flow in the U.S., bringing crude to the nation’s storage hub and delivery point for Nymex futures contracts in Cushing, Oklahoma. The American grade has traded at an average discount of about $17 a barrel this year, compared with a premium of about 95 cents in the 10 years through 2010.

Brent has also been buoyed by U.S. and European sanctions on Iran, which choked off about 1 million barrels a day, or 1.1 percent of the global total, according to data compiled by Bloomberg. The Buzzard field in the North Sea, which pumps 200,000 barrels a day, was shut for two months for maintenance.

The price gap will narrow to as little as $4.50 next year, as the glut in Cushing eases, according to Goldman Sachs Group Inc. The Seaway pipeline, operated by Enbridge Inc. and Enterprise Products Partners LP, will be able to send 400,000 barrels a day from Cushing to the Houston area starting Jan. 1, compared with 150,000 a day now, Enterprise Chief Executive Officer Mike Creel said on Nov. 13.

Big Short

The last time the U.S. rivaled Saudi Arabia proved a disaster for America’s oil industry and for the kingdom. U.S. production expanded 10 percent from 1976 to 1985, reaching the highest level since the Arab embargo in 1973.

By late 1985, the Saudis were pumping more crude to defend their market dominance. WTI plunged to $10 a barrel in March 1986. U.S. output declined for 21 of the next 22 years and didn’t start growing again until 2009.

Now, the U.S. may be producing too much oil and WTI may drop as low as $50 a barrel within the next two years unless policy makers scrap a law limiting exports, Francisco Blanch, the head of commodities research for Bank of America Merrill Lynch in New York, said in an interview.

“WTI is our big short for next year,” Blanch said. Should futures fall to between $50 and $65 a barrel, production gains will slow, he said.

If the U.S. natural gas market is any guide, declining prices don’t guarantee reduced supply. Gas dropped to a 10-year- low of $1.902 per million British thermal units in April. New production technology helped drive inventories to a record last month even though the number of gas rigs operating in the country fell to a 13-year low on Nov. 9, according to Houston- based Baker Hughes Inc.

“What’s going on with U.S. oil is the biggest development over the last 40 years,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said in a telephone interview. “U.S. shale, rather than anything, is the game changer. OPEC nations are concerned, all of them.”

Bloomberg News

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