New U.S. pipelines and a revival in Libyan supply are increasing the likelihood that oil prices will slump through year-end after climbing in the first six months.
Wall Street analysts tracked by Bloomberg predict West Texas Intermediate oil (NYMEX:CLQ14) will average $100 a barrel in the fourth quarter, down 5.1 percent from June 30, while Brent drops 4.8 percent to $107. Violence in Iraq sent Brent to $115.71 in June, its highest level since September, on concern supplies would be disrupted.
Brent (NYMEX:SCQ14) is poised to decline in part on increased output in Libya as key export terminals were reopened. In the U.S., traders are focused on supplies at Cushing, Oklahoma, the delivery point for the WTI futures contract. Tallgrass Energy Partners LP plans to complete the conversion of the Pony Express pipeline to carry crude to Cushing from Wyoming. Enbridge Inc.’s Flanagan South will connect to the hub from Illinois.
“Cushing is an island of scarcity in a sea of plenty,” Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas SA in London, said by phone on July 2. “In the third quarter we’re looking at two new pipelines, the Flanagan and Pony Express, that will supply Cushing. There will then be a new equilibrium.”
WTI rose 7.1 percent in the first six months of 2014 on the New York Mercantile Exchange as Cushing supplies tumbled to a five-year low, with new lines carrying oil to the Gulf Coast. The U.S. grade fell $4.21 to $102.29 during the nine days ended July 9, the longest stretch of declines since 2009, and dropped as low as $101.80 today.
Brent, the benchmark for more than half the world’s oil, gained 1.4 percent on the London-based ICE Futures Europe exchange. It fell as much as 1.3 percent to $107.30 a barrel today, the lowest intraday level since May 7.
Brent was headed for a drop in the first half until the widening conflict in Iraq raised concern of a supply disruption. Prices fell after an Islamic insurgents’ advance stopped short of southern Iraq, home to most of the country’s crude output.
The spread between the contracts narrowed to as little as $3.59 in April from $14.95 on Jan. 13, before the opening of the southern leg of the TransCanada Corp.’s Keystone XL. Stockpiles have slipped 50 percent since the pipeline began moving barrels from Cushing to Texas on Jan. 22, Energy Information Administration data show. The spread was $5.61 as of 9:06 a.m. in London.
“We’re looking for a change in the balances with the opening of the Pony Express and Flanagan South pipelines,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York, said by phone on July 7.
Cushing supplies began falling two years ago when the direction of the Seaway pipeline was reversed to move oil away from the hub. Enbridge and Enterprise Products Partners LP said July 3 that they completed a 512-mile (833-kilometer) loop that’s expected to boost Seaway’s capacity to 850,000 barrels a day from 400,000.