Seaway Pipeline gets turned around; oil markets react quickly

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By John Kingston

Here are some of the questions we’ll be pursuing regarding the reversal of the Seaway Pipeline, announced earlier this morning as part of the sale by ConocoPhillips of its 50% Seaway stake to Enbridge Energy Partners.

–The Brent/WTI spread has been less than $10/b on the news, a movement of as much as $3/b in one day. It’s been as wide as $27 in recent months. We wrote about a prominent analyst predicting it would go to $40.

But here’s another number: $7. That’s the figure that has been thrown about loosely about how much it costs to move a barrel of crude out of the Bakken by rail to the Gulf of Mexico or to other points. There is obviously a great deal of variability depending on where the oil is going. But the key point is if the Brent/WTI spread continues to narrow on both the news and the early 2012 start of 150,000 b/d of crude moving down Seaway to the Gulf of Mexico, does the spread narrow so much that the $7 train ticket for a barrel of crude become too steep? And if that happens, does the Seaway reversal, at a certain point hinder rail enough that it makes that option for moving Bakken crude less competitive?

–There are numerous non-US crude grades that can be delivered against the NYMEX crude contract. You can find them here; go to page 4.

When the NYMEX light sweet (i.e., WTI) price was consistently more than the Brent price, the deliverability of those grades always acted as a brake against the price of WTI running away from the rest of the market, due to its disconnected state from the rest of the world. If Merc crude got too high, the deliverability would allow these grades to be moved up Seaway and delivered against the Merc contract, keeping the Merc price in check. This became moot when the price of WTI collapsed relative to Brent. But the other deliverable crudes remained on the books.

Without Seaway running from the Gulf of Mexico to the NYMEX delivery point of Cushing, Oklahoma, how could those grades get there? So do they remain as deliverable crudes?

–The quick hit list of winners and losers might look something like this:

Winners: Gulf Coast refiners, with pipeline access to all the oil sands and Bakken crude flowing into Cushing; North Dakota producers (if they can get the oil from the Bakken down to Cushing in the first place); Enterprise Partners, who won’t need to build the Wrangler Pipeline to capitalize on the need for a Cushing-Gulf Coast crude line, since it will own 50% of a now reversed Seaway Pipeline

Losers: exporters of crude to the US, whose market into the Gulf Coast may close a bit as more oil drains from tanks at Cushing and down to the Gulf Coast; railroads, for the reason listed above; possibly the Keystone XL Pipeline, if its MarketLink section from Cushing to the Gulf gets pushed aside by Seaway (as if it didn’t have enough other things to worry about, and also the fact that TransCanada officials said today it could compete); Midcontinent refiners who almost certainly will see their tremendous refining margins shrink.

Source – The Barrel

Posted on November 16, 2011, in Energy, GEOPOLITICS, Oil, Political economy and tagged , , , , , , , , , . Bookmark the permalink. Comments Off on Seaway Pipeline gets turned around; oil markets react quickly.

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