Enbridge Inc. and Enterprise Products Partners LP haven’t just reversed the way benchmark oil flows in the U.S. They also changed the price relationship in the futures market by creating a temporary glut in the main delivery point for crude contracts.
The reversal of the 500-mile (805-kilometer) Seaway pipeline from the trading hub at Cushing, Oklahoma, to refineries on the Gulf Coast is intended to clear a supply build-up that depressed prices of West Texas Intermediate oil traded on the New York Mercantile Exchange. The shift is attracting more oil to Cushing to meet demand once crude flows change direction. Inventories grew 6.4 percent to 32 million barrels in the past seven weeks, according to U.S. Energy Department data.
Increased stockpiles depressed crude for next-month delivery, making it less expensive than later futures so that investors have to pay more for each successive contract. January oil traded in contango, or at a discount to August crude, on Nov. 22 for the first time in a month, following the action by Enbridge and Enterprise six days earlier.
“We expect the WTI contango to increase in coming months as Cushing inventories rise in anticipation of the reversal,” David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said Nov. 23 in a phone interview. “After the reversal of the Seaway, these barrels would move down to the U.S. Gulf Coast, drawing Cushing inventories back down and reducing the contango.”
Oil for January delivery gained 0.8 percent to $97.53 at 12:46 p.m. on the Nymex. That compares with $97.68 for the February contract, a premium of 15 cents, down from 20 cents on Nov. 23.
Over the past five years, oil for front-month delivery was in contango versus the contract for the next month 82 percent of the time. The front month was in backwardation, or more expensive than the next month, on 18 percent of trading days.
U.S. crude rose relative to Brent for January settlement last week on the London-based ICE Futures Europe exchange as Brent prices dropped $1.38, or 1.3 percent, to $106.40 a barrel on Nov 25. Between 2001 and 2010, WTI traded at a premium of 87 cents a barrel to Brent, according to data compiled by Bloomberg. With an influx of oil at Cushing, that flipped to a record discount of $27.88 on Oct. 14. The gap has since narrowed 63 percent to $10.38 today.
Refiners on the Gulf Coast have been forced to pay higher prices for imported oil because of a lack of transport from Cushing. Oil used on the Gulf has been linked to Brent, which is the benchmark for more than half of the world’s oil.
The Seaway line will operate with a capacity of 150,000 barrels a day by the second quarter of 2012, according to Enterprise and Enbridge. Pump modifications expected by early 2013 will boost that to 400,000 barrels.
Currently, there is 1.64 million barrels a day of pipeline capacity into Cushing and only 995,000 out, according to Martin Tallett, founder of EnSys Energy & Systems Inc., a Lexington, Massachusetts, consulting company.
Additional lines may be needed to handle increased production. Canadian output will jump 37 percent to 2.16 million barrels a day in 2015 from 1.58 million this year, the Canadian Association of Petroleum Producers said in June.
North Dakota, which produces oil from the Bakken field, almost doubled output in the past two years and pumped a record 464,129 barrels a day in September, according to the state government. Production may grow to between 1.5 million and 2 million barrels a day within five years, Katherine Spector, a New York-based analyst with CIBC World Markets Corp., said Nov. 22 at The Energy Forum in New York.
The Seaway reversal is replacing Enbridge and Enterprise’s Wrangler pipeline proposal, which would have carried as much as 800,000 barrels a day from Cushing to the coast by mid-2013, Rick Rainey, a company spokesman, said Nov. 16.
Enterprise and Energy Transfer Partners LP said Aug. 19 they wouldn’t move forward with plans to construct a separate 584-mile line from Cushing to Houston.
The State Department announced Nov. 10 it was delaying a decision on TransCanada Corp.’s proposed Keystone XL oil pipeline to study an alternative route for the $7 billion project that avoids environmentally sensitive areas in Nebraska.
Further study “could be completed as early as the first quarter of 2013,” said the department, which has jurisdiction over the line because it crosses an international border.
“Because of all the euphoria around Seaway, we’ve lost a lot of other news in the background,” said Amrita Sen, a London-based analyst with Barclays Plc. “A lot of key pipelines have actually been canceled.”
For now, January futures on the Nymex are cheaper than every contract through June, when prices turn lower than previous months. Oil for delivery in December 2012 trades at $97.58 a barrel, falling to $93.50 the following December and $91.08 in the same month of 2014.
The months closest to delivery will remain in contango until next year because of ample stockpiles at Cushing and a slowing economy, Harry Tchilinguirian, the London-based, head of commodity markets strategy at BNP Paribas SA, said Nov. 25 in a phone interview.
Oil for sale at a later date is lower, reflecting the concern of hedge funds about bullish bets when there is “uncertainty in the global economic outlook,” he said.
- Seaway Pipeline gets turned around; oil markets react quickly (mb50.wordpress.com)
- Conoco’s Brent Control (mb50.wordpress.com)
- Enbridge, Enterprise Products To Reverse Seaway Crude Oil Pipeline (mb50.wordpress.com)
- Oil in New York Surges Above $100 on Reversal of Seaway Pipeline (mb50.wordpress.com)
- Brent WTI crude spread collapses on Seaway pipeline reversal (tradingfloor.com)
NEW YORK, Nov 16 (Reuters) – Enterprise Partners and
Enbridge plan as part of the reversal of the Seaway pipeline
project to build an 85-mile (135-km) pipeline from its ECHO
terminal in Houston to refineries in Port Arthur, a spokesman
for Enterprise said on Wednesday.
The pipeline’s open season to garner shipper commitment
will happen early in 2012.
‘It will allow heavy Canadian crude access to Port Arthur
refineries,’ said Rick Rainey, spokesman for Enterprise.
(Reporting by Janet McGurty)
- Enbridge, Enterprise Products To Reverse Seaway Crude Oil Pipeline (mb50.wordpress.com)
- Enbridge buys $1.15 Seaway oil pipeline stake (cbc.ca)
- Crude Passes $100 (zerohedge.com)
by Loren Steffy Posted on November 14, 2011 at 6:37 am
The Keystone XL pipeline may be the first shovel-ready project buried by foot-dragging.
While the Obama administration allows the proposed pipeline, which would move oil from Canada’s oil sands region in northern Alberta to Gulf Coast refineries, to languish, market demands will ensure the oil is transported south by other routes. By the time Keystone gets the green light from the State Department, there may be no demand for it.
Last week, the administration said it would consider alternative routes for the Keystone project to avoid environmentally sensitive areas. It’s a political non-decision that avoids angering key Democratic constituents before next year’s presidential election. Approving the pipeline would have angered environmentalists; rejecting it would have angered labor unions.
Keystone’s stagnation, though, is good news for Houston-based Enterprise Product Partners, which has teamed with Canada’s Enbridge to build its own Alberta-to-the-Gulf network.
Enbridge already has lines to move oil from Alberta to Chicago – avoiding the need for State Department approval – and from there to Cushing, Okla.
Enterprise’s proposed Wrangler line would transport the oil from Cushing to the Houston area.
“Wrangler becomes the only game in town if Keystone’s going to be pushed back a year,” said Jeff Dietert, an analyst with Houston-based Simmons & Company International. “Producers and shippers are going to be interested in moving crude sooner than that.”
Pipelines don’t compete the same way that, say, retailers do. Demand is measured by long-term commitments for oil and other products. But Enterprise CEO Mike Creel acknowledged that with Keystone on hold, more people may see Wrangler as the best option for moving oil to the Gulf.
“We’ve had a very good reception so far,” he said. “We’ve got the right support from producers and shippers.”
As I wrote this summer, increased oil production from Canada and shale formations in places like North Dakota have resulted in a glut of oil at the pipeline hub in Cushing. That oversupply is keeping prices on West Texas Intermediate crude lower than the world price, which is what most refiners are paying.
The question is how much additional pipeline capacity is needed to bring prices into balance, which would, in theory, result in lower gasoline prices at the pump.
“There’s been a lot of debate about how much really needs to be built,” said John Cusick, an analyst with Wunderlich Securities in New York. “You just hear so much about all of the crude that’s stranded in Cushing.”
In addition to the Wrangler project, other companies are considering ways to get more oil to the Gulf. Houston-based ConocoPhillips, for example, has put its share of the Seaway pipeline up for sale. Currently, the line moves oil from the Gulf Coast inland to supply ConocoPhillips’ Midwestern refineries.
But with the sale – Enterprise owns the remaining interest in the line – the new owners may decide to reverse the flow.
As other companies move in, last week’s delay leaves Keystone’s future far more uncertain than either the administration or the company behind the project, TransCanada, are willing to admit.
“We remain confident Keystone XL will ultimately be approved,” TransCanada’s chief executive, Russ Girling, said in a statement. “This project is too important to the U.S. economy, the Canadian economy and the national interest of the United States for it not to proceed.”
But it’s not likely Keystone will seem as important a year from now, or that TransCanada or its customers will stick with the project through the latest delay.
With Keystone buried in uncertainty, Enterprise and Enbridge have gained the upper hand.
Source – Fuel Fix
- API: White House decision on Keystone XL puts politics above jobs (mb50.wordpress.com)
- Keystone pipeline delays will be ‘costly’ (cbc.ca)
- Harper ‘disappointed’ by Keystone pipeline delay (cbc.ca)