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Energy Markets: Shale Boom Cuts Gulf Oil Premium to 24-Year Low

By Dan Murtaugh
September 07, 2012

The U.S. shale boom has driven the cost of Gulf Coast light, sweet oil to its lowest level versus Brent crude in almost a quarter century as the nation’s dependence on foreign supplies wanes.

Light Louisiana Sweet, the benchmark grade for the Gulf Coast known as LLS, has traded on the spot market at an average of 15 cents a barrel more than Brent this year, the smallest premium since at least 1988, data compiled by Bloomberg show. The spread’s highest annual average was $4.02 in 2008.

The drop has cut costs for refiners in Texas and Louisiana accounting for 45 percent of U.S. capacity and replaced competing shipments from Africa. Gulf imports of light, sweet crude have fallen 56 percent since 2010, according to U.S. Energy Department data. A shale-oil influx from the Eagle Ford formation in Texas and Bakken in North Dakota and new ways to bring crude to the Gulf, such as this year’s reversal of the Seaway pipeline, may accelerate the shift.

“The market dynamics are changing,” Edward L. Morse, head of commodities research at Citigroup Global Markets in New York, said in a telephone interview. “When the Gulf Coast was a crude importer, they had to attract crude from elsewhere in the world, which meant LLS had to be at a premium to Brent. But now we’re moving into a totally different situation.”

Light Louisiana Sweet, a grade prized because its low- sulfur content and density make it easier to process into fuels such as gasoline, was 92 cents cheaper than Brent yesterday. It averaged 20 cents less than the benchmark in the third quarter.

Brent oil for October settlement rose 40 cents, or 0.4 percent, to $113.49 a barrel yesterday on the London-based ICE Futures Europe exchange. The contract advanced as much as 0.5 percent to $114.05 in trading today.

Energy Independence

U.S. oil output surged to the highest level in 13 years in July, according to weekly Energy Department data. The U.S. met 83 percent of its energy demand from domestic sources in the first five months of this year and is heading for the highest annual level since 1991, department figures compiled by Bloomberg show.

“Unconventional oils and gas are changing everything about our competitiveness in the United States,” Bill Klesse, Valero Energy Corp.’s chief executive officer, said yesterday at the Barclays CEO Energy/Power Conference in New York. “Before you know it, we’re going to have so much light, sweet crude that in the U.S. Gulf Coast we’re not going to be importing light, sweet crude, and we think that happens next year.”

Houston, New Orleans and other ports along the Gulf Coast accepted about 554,000 barrels a day of light, sweet oil from outside the U.S. in June, down from 964,000 barrels a day in June 2011 and about 1.25 million in June 2010, according to the Energy Department’s Energy Information Administration.

African Imports

The West African nations of Nigeria, Angola, Gabon and Equatorial Guinea accounted for 58 percent of the light, sweet crude imported into Gulf Coast ports in June 2012. North African nations accounted for a further 30 percent.

LLS will become about $5 a barrel cheaper than Brent during the next 12 months, David Pursell, a Houston-based managing director for Tudor, Pickering, Holt & Co., said in a telephone interview. The discount would take into account the extra cost of getting LLS to other customers, such as refiners on the East Coast, Pursell said.

Like oil in the Midcontinent, the relationship between LLS and Brent has been upended by surging shale production. West Texas Intermediate oil at Cushing, Oklahoma, the U.S. benchmark grade traded on the New York Mercantile Exchange, shifted to a discount to Brent almost two years ago after trading at a premium for decades.

Midcontinent Glut

Cushing inventories surged to 47.8 million barrels in June, the highest level since Energy Department records for the hub began in 2004. The WTI-Brent spread reached a record $27.88 in October. It was at $18.03 a barrel today.

“Over the last year and a half, with the WTI-Brent spread blowing out, the primary beneficiaries have been the Midcontinent players,” Cory Garcia, a Houston-based oil analyst for Raymond James & Associates, an arm of the financial-services company with almost $40 billion under management, said in a phone interview. “As LLS disconnects next year, the benefits to Gulf Coast refiners will be brought to the forefront.”

Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) reversed the flow of crude on the Seaway pipeline on May 19. The link, carrying as much as 150,000 barrels a day from Cushing to Gulf Coast refineries, is scheduled to pump as much as 400,000 barrels a day early next year.

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Oil Is Diving

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Joe Weisenthal

Watch out: Oil could soon break below $100 again.

After a snap fall on the back of that weak jobs report, crude is making another jut lower this morning, to just above $101/barrel.

From FinViz:

Read more: BI

What The Worst-Case Scenario In Iran Would Mean For World Oil Prices

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Joe Weisenthal

UBS commodities strategist Julius Walker has a note out on the prospects of an oil shock in Iran, what such a shock could look like, and the potential impact on commodity prices.

Walker sees four main possibilities, ranging from somewhat benign to extremely costly.

We summarize them quickly here.

  • Scenario #1: EU sanctions get put into place starting July 1, resulting in 0.6 million of barrels per day coming off the market. In this case, Brent Crude would rise to about $130/barrel, though possibly less, since the embargo might make exemptions for some distressed buyers of Iranian oil, like Italy and Greece.
  • Scenario #2: Full EU sanctions are put in place, plus there’s another 10% cut from other customers. In this case, we’d be talking about oil going to $138/barrel.
  • Scenario #3: Iranian crude exports are halted entirely, perhaps as a result of an Israeli air strike. Then we’re talking about a loss of 2.5 million barrels per day of supply, and Brent Crude prices up around $205.
  • Scenario #4: The complete shutdown of Iranian oil. This would require some kind of military action and wide internal upheaval. In this case, the world would lose 4 million barrels per day, and we’d see crude as high as $270 per barrel.

Read more: BI

Brent > LNG > WTI > NG

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Jack H. Barnes

Or said differently; When Brent flies, and WTI dies.

The energy industry has the appearance that it is about to undergo a major shift in pricing structures again. We saw it lately with the spread between crude and NG blowing out. We have seen signs of it happening in Brent and WTI before, and I expect we will see new signs of it again.

To be clear, we could see extremely expensive Brent oil, as international supply fears increase with tension in Iran. This would be happening while the price of WTI, a lighter sweeter standard, crashes in US terms do to its own over supply and lack of demand issues.

This would all be happening under a backdrop of world markets bidding for refined products from a US export happy refining complex. This would lead to US gasoline prices hitting all-time highs, while refinery complexes in the US Midwest would have the highest profit margins in their history.

The US Midwest is growing its own domestic sources of oil, while its own capacity to ship the oil out is limited. This causes a bottle neck in exports in the region. This is causing the price locally to crash.

The planned refinery work in the Midwest has lowered the take-off demand for Bakken oil. This is happening inside of a window of time while the Bakken production sets all new production records every month.

This is causing the price of oil in the Midwest to crash in localized markets, as the take-off capacity does not equal the supply of new barrels. The region is buried in supply, all of which is now seeking a path to Houston refining complex.

The price difference of an equivalent grade of oil in Bakken Terminals & Louisiana terminals is now $40. This imbalance in like qualities will generate a short term arbitrage trucking bonanza, as the profit per trip approaches silly levels.

I expect to hear about a fleet of white trucks driving loads of crude oil from the Midwest to the refining complexes with accessible pipelines capacities. You don’t have to drive it all the way there, to deliver it.

I wish I had a fleet of modern fluid haulers right now. There is more oil supply in the Bakken then local demand, and that won’t change much when the refinery’s turn around. The Bakken supply is still growing every month, and will for a while.

The growth in rail take off capacity will not keep up with the growth in new oil production in the near to intermediate term. This will lead to price differentials that will last longer than people expect. There is always a profit to be made when these events happen. It will be interesting to see who ends up owning those fleets of white trucks.

Just like the old gold rush stories of stores making more then people digging for gold. There just might be more money made in shipping the oil by truck, then there is in producing it, or refining it. As they say, this could get interesting in the near term.

Read more: BI

Oil Surge Begins

Tyler Durden's picture

Submitted by Tyler Durden

Just as Europe seems destined to tip into recession and the US growth miracle decouples its reality from perceived global slowdowns, the oil market steps in to balance the equation. With WTI breaking $102 and Brent over $111 this morning, driven by Iran and Syria tensions, it would seem tough for a nation exporting its way to success, that is so dependent on both domestic consumer and energy to grow ‘as expected’ with energy premia so high – or perhaps the justification is the energy sector will carry the S&P through the next quarter as earnings expectations are cut. Nevertheless, as Reuters points out, the risk of supply disruptions remains high.

Reuters: Oil up near $111 on Iran supply risk concerns

Oil prices rose on Monday with Brent crude futures up near $111, extending last week’s gains as rising tensions between Iran and the West increased the risk of disruption to crude shipments by the world’s fifth-largest oil exporter.

Iran warned on Sunday that any move to block its oil exports would more than double crude prices with devastating consequences for a fragile global economy.

Brent crude was up $1.14 at $111.08 a barrel by 1313 GMT, after last week posting a gain of more than 3 percent, its best weekly gain since mid-October. Earlier Brent had pushed to an intraday high of $111.22 a barrel.

U.S. crude was up 81 cents to $101.77 a barrel, having posted a gain of 4.3 percent last week.

Christopher Bellew, an oil trader with Jefferies Bache in London, said that worries about Iran and Syria were helping to buoy oil prices. “If Iranian exports were suspended that would be very significant as the market is tight already,” he said.

The European Union is considering a ban – already in place in the United States – on Iranian oil imports. The storming of the British Embassy in Tehran last week has opened the door for tougher action against Iran which is thought to be working on a nuclear bomb.

The risk of disruptions to oil supplies remains high,” said Christophe Barret, global oil analyst at Credit Agricole CIB. An embargo on Iranian oil “would introduce severe disruption to refining in several EU countries” he said.

Barret added that speculation about possible military strikes on Iranian nuclear sites have helped to increase the risk premium on oil prices.

But on Friday, U.S. Defense Secretary Leon Panetta made one of his most extensive arguments to date against any imminent military action against Iran over its nuclear programme, saying he was convinced sanctions and diplomatic pressure were working.

Israel has called a nuclear-armed Iran a threat. Iran says it is enriching uranium for peaceful purposes.

In Syria, EU sanctions are already biting with Royal Dutch Shell shutting down its activities there.

On Monday, Gulfsands Petroleum said it was reviewing the impact of the latest EU sanctions against Syria on its production activities and its contracts with the Syrian government and the General Petroleum Corporation (GPC).

“Syria was exporting about 400,000 barrels per day at the start of the year and it is probably exporting nothing at the moment,” said Bellew.

Oil ministers from OPEC members Kuwait, Oman and Bahrain said that the market was well supplied, echoing similar comments by Qatar’s energy minister and the OPEC Secretary-General Abdullah al-Badri at the weekend.

OPEC will meet next week in Vienna, but with Iran holding the presidency of the OPEC conference until the end of the year, analysts do not expect much from the meeting. Iran is OPEC’s second-largest producer.

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