Glut or no Glut make up your minds how can you swing from shortages to gluts so quickly. You dont!
A Rush to Pipe Oil to Gulf
By BEN LEFEBVREThe race is on to build pipelines to relieve a glut of crude oil in the U.S. heartland, but not all of the four plans will make it to the finish line.
It is a competition that is being closely watched in oil markets. The amount of pipeline capacity that eventually comes on line and the pace at which it is built will determine how fast U.S. and European benchmark oil prices will come together again, analysts say.
On Thursday, crude futures on the New York Mercantile Exchange settled at a record $26.49-a-barrel discount to Brent crude, now widely seen as a more accurate indicator of world oil prices.
Nymex crude lost 3.7% this week to close Friday at $82.26 a barrel, while Brent on the ICE futures exchange finished in positive territory, up 0.8% to $108.62 a barrel.
The difference between Nymex and Brent oil prices should narrow once an outlet for this glut is created, said Sander Cohan, an analyst with energy consultancy ESAI Inc.
"These pipeline projects are coming in part because of the conditions" causing the Brent-Nymex divergence, Cohan said.
Enbridge Energy Partners LP, Enterprise Products Partners LP and TransCanada Corp. are all in various steps of planning for new pipelines.
In addition to the new pipeline proposals, Magellan Midstream Partners said it is considering expanding its Longhorn pipeline and reversing its flow to bring crude from revived oil fields in West Texas to Houston instead of shipping the oil to Oklahoma.
The pipeline companies, which charge tolls on every barrel shipped along their lines, stand to profit from giving Gulf Coast refiners direct access to the bounty trapped in Cushing, Okla., an oil storage hub that acts as the delivery point for Nymex futures.
But the four proposals have a total capacity of 1.4 million barrels a day—about twice the amount that analysts have said is needed.
"The issue here is not all these projects will go through," Cohan said. "First movers will have the advantage."
Currently, there is no pipeline that takes oil south from Cushing, to the main U.S. refining hub on the Gulf Coast.
Crude is piling up at Cushing due to the oil boom in western Canada and in onshore producing regions in the U.S. That is what is keeping Nymex prices suppressed.