Oil sees world of haves and have-nots

Pipeline problems

Of course this highlights the growing nuances in the U.S. crude oil market. Today’s Wall Street Journal writes when it comes to oil it is location, location, location. “What's the price of oil?" That question has taken on a whole new meaning, and thereby created a list of winners and losers for investors. The average spot price for Brent crude oil in 2012 was about $112 a barrel. Meanwhile, West Texas Intermediate averaged only $94, a 16% discount. But that is nothing compared with some lesser-known benchmarks. Oil priced at Clearbrook, Minn., mainly barrels produced in the prolific Bakken basin, got just $88, a 22% gap. Western Canadian Select crude, meanwhile, sold for an average of about $74 a barrel, a one-third discount to Brent. Today, those Canadian barrels command less than $65 a barrel against Brent's $113.

The reason? Rising output from inland fields has overwhelmed the infrastructure that gets oil to market. In areas lacking easy access to refineries and consumers, which are largely on the East, West and Gulf coasts, supply gluts form, forcing discounts. Pipeline operators are obvious winners, and not just because of fees they charge for usage. Larger firms with a diverse set of pipes and storage tanks can use those to arbitrage disconnected prices. For example, profit per barrel in Plains All American Pipeline's supply and logistics division has almost doubled since 2009.Railroads also benefit. Rail is more expensive: It costs $8 a barrel to pipe Western Canadian oil to Houston, for example, but $14 by rail, according to Deutsche Bank. Still, if you are a producer facing a $50-plus spread to Brent and rail is the only option, you'll take it. Moreover, as Darren Horowitz of Raymond James points out, railroads offer flexibility. While pipelines usually require multiyear contracts, railroads sell their services on much shorter schedules. They can also quickly link regions where pipelines are scarce, such as between Midwestern fields and East Coast refineries. The oil boom is helping some railroads cope with falling coal cargoes. Canadian Pacific Railway and Kansas City Southern could see the biggest boost to earnings from shipping oil in the next few years, according to Credit Suisse. Other winners are midcontinent refiners such as Holly Frontier. They can process cheaper, relatively local oil and then sell the refined products. Because refined products can be freely exported from the U.S., they command higher global prices relative to domestic crude oil, which can't. On the losing side are producers heavily exposed to more-discounted crudes. Firms such as Canadian Natural Resources and Baytex Energy for which medium and heavy Canadian oil makes up most of their output, have seen their stocks lag well behind the exploration and production sector over the past year.

But even they may now spell opportunity. While the future of the Keystone XL pipeline, a major potential route south, remains questionable, help is coming from other quarters. One is BP's Whiting refinery near Chicago, which is being retooled to absorb more heavy Canadian oil in the second half of 2013. And as new pipelines and rail links narrow the gap between WTI and Brent, that should also pull up the price of Canadian oil.

Above all, cheap oil attracts buyers and logistics firms. The big discounts on Bakken crude led railroads to add almost one million barrels a day of transportation capacity last year, according to investment bank Tudor, Pickering, Holt. It estimates a combination of pipelines, rail trucks and barges could close the discounts on Canadian crude by $20 a barrel or more in the next couple of years. That could boost profits substantially. Every $10 a barrel extra that Baytex gets on its heavy crude oil would boost 2013 cash flow per share by 16%, according to RBC Capital Markets.

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