HardAssetsInvestor

Written by Sumit Roy  |

November 16, 2011

Crude Oil Report: U.S. Inventories Plunge Again, WTI-Brent Spread Falls On Seaway Pipeline Reversal

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WTI tops $101 on news that oil deal will help alleviate glut.

The Department of Energy reported this morning that in the week ending Nov. 11, U.S. crude oil inventories decreased by 1.1 million barrels, gasoline inventories increased by 1 million barrels, distillate inventories decreased by 2.1 million barrels and total petroleum inventories decreased by 8.7 million barrels.

Crude oil prices were mixed after the latest figures, with Brent down near $111/bbl, while WTI rose to $101.50 — a five-month high.

WTI’s outperformance was spurred by news that Enbridge had agreed to buy ConocoPhillips’ 50 percent stake in the Seaway pipeline. The new joint owners — Enbridge and Enterprise Products Partners — have agreed to reverse the flow of crude oil on the pipeline from the Gulf Coast to Cushing, Okla., (the delivery point for NYMEX-WTI contracts). Crude will now flow from Cushing to the Gulf Coast. About 150 Kbbl/d of the pipeline's capacity is set to be reversed by the second quarter of 2012; another 250 Kbbl/d may be reversed by early 2013.

Up until now, the former joint owner of the Seaway pipeline, ConocoPhillips, had been reluctant to reverse the pipeline since its Midwest refineries had been benefiting from cheap crude oil in the region. The company’s scheduled breakup into two separate companies — an upstream producer and a refiner — have changed its priorities.

Obviously this latest move will alleviate some of the glut in Cushing and the broader Midwest region. “In the short term, this will definitely clear some of the crude out of Oklahoma,” said Francisco Blanch, head of commodities research at Bank of America. But, “this may not be enough to eliminate the glut in the Midwest because output is growing hundreds of thousands of barrels a year. We still need additional transportation capacity.”

Indeed, U.S. crude oil production hit yet another eight-year high last week, fueled by surging production in the various unconventional shale plays in the Midwest. U.S. output is 300 Kbbl/d higher than it was last year at this time.

“The reversal of the Seaway is not enough,” said Blanch. “We will still need to see the Keystone pipeline built along with additional projects.”

Nevertheless, WTI’s discount to Brent has narrowed significantly this week, falling as low as $8.32 — the smallest since March. But, until the gap disappears, Brent remains the better reflection of global supply and demand fundamentals.

Speaking of Brent, the benchmark has been stuck in a narrow range between $110 and $115 a barrel as strong global fundamentals are offset by the ongoing sovereign debt crisis in Europe. We wrote at length about the latest developments in Europe in our latest Precious Metals Monitor. Suffice it to say, the situation on the continent is extremely concerning, with financial markets facing the possibility of a major shock akin to that of 2008/2009.