Don't think of it as crude oil prices rallying, think of it as
Brent crude prices falling. Oil prices surge above $100 a barrel
for the first time since last July as the "broken" global oil
market gets fixed in a big way. Conoco Phillips had a big payday
by selling its interest in Gulf Coast Seaway pipeline in Cushing,
Oklahoma to Enbridge Corporation which will reverse the flow of
oil out of instead of into the NYMEX delivery point in Cushing,
Oklahoma. This is a big step to ending the bottleneck in Cushing
and allow the bonanza of Canadian oil sands crude and shale crude
to be sent to Gulf Coast refiners that have too often had to rely
on foreign imports of crude.
Followers of crude imports realize the cost of imported crude
was rising as evidenced by what became a record differential
between the Brent Crude versus West Texas Intermediate spread.
West Texas Intermediate (
), which historically Brent Crude traded at a premium to,
reversed on a host of challenges. In Oklahoma the influx of crude
exceeded refiners ability, or at least desire, to run crude at
those rates that would use the influx of new sources of oil. In
the Gulf Coast where supplies were tight the infrastructure did
not exist to transport the oil in sufficient amount. The US
pipelines remain the most popular transport option, carrying
about two-thirds of U.S. oil.
So instead of oil getting to refiners that needed it, it got
backed up in storage in Cushing,Oklahoma. Oil supplies hit a
record high in Oklahoma in April ahead of the Libyan conflict.
Problems with North Sea production and the loss of Libyan crude
oil created a tightness of supply of the light sweet crude.
European refiners can only refine the higher quality blends and
that set the stage for Brent crude trading at a record high
against the WTI.
Now remember, before you get bent out of shape thinking that
one hundred dollar a barrel oil WTI will mean higher gas prices.
Think again. The truth is that while WTI is rising, remember
Brent crude is falling. We are seeing a rebound in North Sea
production and Libyan oil production is coming back on line much
faster than some of the more pessimistic traders predicted. If
you remember last summer the price of gasoline and products were
going up as Brent crude increased. While the price of oil might
rise at first because of declining supplies in Cushing, the
easing of the Cushing bottleneck will lower prices for products.
If US refiners can get their hands on more Canadian and US crude
from shale production, the refining margins should improve and we
should become less reliant on foreign imports. In other words,
this reversal is a positive for the US market and the
anticipation of that positive situation has tightened the
Brent/WTI spread to the tightest level in 6 months.
We saw a big drop in the price of heating oil as traders
believe that the influx of crude will be released in the heart of
heating season and ahead of the summer driving season. Reuters
News said, "Conoco had been believed to be standing in the way of
the Seaway reversal to protect its refining profits in the
Midwest, but its decision to sell out put the line into play.
Then came the apparent success of the Enbridge and Enterprise
Products Partners' Wrangler pipeline proposal, an 800,000 bpd
behemoth that seems to have garnered enough support to enter
service by 2013. But now the schedule has moved up. With Seaway
possibly entering limited reversed service by mid-2012, the risk
that refinery maintenance periods will lead to a massive buildup
of crude that will be difficult to run down in the summer has
faded. Conoco, for its part, seems to have done very well. The
major, which is breaking itself apart after a decade of deal
making, will get $1.15 billion from Enbridge for its interest in
Seaway, a huge sum for a humdrum logistics asset."
At the same time there are other plans to ease the congestion
in the now suddenly over crowded US pipeline system. New
pipelines and rail lines are being built not only to ease the
congestion in Cushing but to move oil all over the country. The
Energy Information Agency reported that figures from the
Association of American Railroads (
) shows that tracks combined rail movements of oil and refined
petroleum products rose in the first ten months of 2011 by nearly
300,000 tank cars up 9.1% from the same period in 2010 which is
much stronger than the 1.8% increase for all railroad cargo
combined during the same period.
At the same time they report strong demand for tank cars in
North Dakota because of the boom of shale gas production from the
Bakken field. The Energy InformationAgency says that in North
Dakota oil production has soared from about 343,000 barrels per
day (bbl/d) in January to a record high of about 464,000 bbl/d in
September, sourcing North Dakota's Department of Minerals
Railrorods are desperately trying to build track to keep up
with the demand. The EIA says that the DMR expects North Dakota
will pass California during the second quarter of next year to
become the third biggest oil-producing state. Burlington Northern
Santa Fe (BNSF) and other railway companies are building or
expanding terminals and adding tank cars to transport North
Dakota's growing oil supplies to Gulf Coast refineries. On
November 7, the first crude oil unit train on the Bakken Oil
Express, a newly constructed rail hub near Dickinson, North
Dakota, departed via the BNSF Railway carrying its first
shipment, 70,000 barrels of crude oil destined for St. James,
Louisiana. The Bakken Oil Express receives Bakken-area crude oil
by both truck and pipeline and has a current takeaway capacity of
100,000 bbl/d. The Bakken Oil Express is already planning a
second phase of construction that would significantly expand its
takeaway capacity to more than 250,000 bbl/d.
Today in the oil patch we are focused on Europe once again!
Make sure you stay up to date with the latest developments by
watching the "Fox Business Network" where you get "The Power to
Prosper" and me every day! Also make sure you get a trial to my
daily buy and sell points and open your account. Just call Phil
Flynn at 800-935-6487 or email me at
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