MARKET WATCH: Seaway pipeline sale boosts oil prices

Crude oil prices closed above $102/bbl Nov. 16 in the New York market with the front-month contract escalating 3.1% after ConocoPhillips agreed to sell its interest in Seaway Crude Pipeline Co. to Enbridge Holdings (Seaway) LLC, a subsidiary of Enbridge (US) Inc. (OGJ Online, Nov. 16, 2011).

The disconnect between West Texas Intermediate and Brent closed below $10/bbl from more than $25/bbl a few weeks ago. However, natural gas traded down for the sixth straight session.

Enbridge Inc. and Enterprise Products Partners LP agreed to reverse the flow direction of the Seaway pipeline to move crude from Cushing, Okla., to the US Gulf Coast, with an initial capacity of 150,000 b/d in second-quarter 2012. Following pump station additions and modifications, the capacity of the reversed Seaway Pipeline is expected to increase to 400,000 b/d by early 2013.

The Energy Information Administration reported Nov. 16 that crude oil inventories at Cushing grew by 900,000 bbl last week, “which was more than offset by the news regarding the Seaway pipeline [and] its impact on WTI,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

However, Olivier Jakob at Petromatrix in Zug, Switzerland, claimed the Department of Energy’s Petroleum Administration for Defense District 2 (PADD 2) for the Midwestern US—including Cushing—“did not really need a pipeline reversal to balance in 2012 (that was needed for later years).”

He said, “Our [earlier] call for a reduction of the Brent premium to WTI was not built on the expectations of new pipe capacity out of PADD 2 for 2012 (although the risk of the Seaway reversal was an add-on) but on the fact that the US Midwest had managed to balance its crude oil supply and demand…by reducing flows into PADD 2. This remains a key point.”

The plan to reverse the Seaway pipeline flow “comes on top of the flow reduction from PADD 3 [the Gulf Coast] to PADD 2.” As a result, Jakob said, “We should have in the summer of 2012 a crude oil supply situation in the US Midwest even more balanced than in recent months, and this while ConocoPhillips and Sunoco are shutting down refineries running on light, sweet crude oil on the US East Coast and while Libyan crude oil is coming back much faster than expected to the markets.”

Jakob said, “On an equity basis, we would not hold too long to shares of Midwest refiners; the long-short strategy will be to be long Midwest producers vs. being short Midwest refiners. The Seaway pipeline reversal is also not good news for shares of ocean transportation companies.”

In yesterday’s energy commodities market, Zhang said, “Gasoline was once again the best performer among the product complex, while middle distillates were lagging after an impressive run in recent weeks. The term structure for WTI also rallied as the front-end WTI contracts were being bought. In contrast, the Brent structure further softened on signs of an improved supply situation.”

He said, “The oil market’s response to another week of bullish inventory report and better-than-expected US industrial production data was again uninspiring, which was largely due to the sluggish sentiment of the broad market. The Euro-zone bond market continues to struggle, amid all the uncertainties. The pressure is now on France as its bond yield also increased significantly in recent days. US industrial production beat expectations again, showing signs of continuous expansion. Meanwhile, US inflation also softened, which allows more room for further policy easing from the Federal Reserve Bank.”

The US consumer inflation report released Nov. 16 was below expectations, down 0.1% for the latest month. “While this might be read as opening the way for more monetary easing (something that would benefit precious metals, especially gold), we prefer to focus on what it might imply about the health of the US economy,” said Marc Ground, another analyst at Standard New York Securities. “The short-term economic supply curve would suggest that when inflation falls faster than expectations, output (in the short run) should decline too. One data point is not a trend, but we would read further price declines beyond expectations as a negative signal for short-term US growth. A weaker US economy could see renewed interest in safe-haven assets, such as gold and silver, which have been at a recent disadvantage to the dollar.”

In other news Nov. 17, the US Department of Labor reported initial applications for unemployment benefits dropped last week by 5,000 to a seasonally adjusted 388,000. It was the fourth decline in 5 weeks and a new low since early April. However, unemployment benefit applications have to be reduced “consistently” below 375,000/week to indicate a sustained rebound in job gains, officials said.

The number of people receiving conventional unemployment benefits was down 57,000 to 3.6 million in the week ended Nov. 5—the lowest number since Sept. 20, 2008. That does not include some 3 million people receiving extended benefits under government emergency programs. Nor does it take into account the high number of long-term unemployed who have exhausted their benefits.

Meanwhile, officials reported only 80,000 new jobs created in October, the fewest in 4 months.

In other news, the European headquarters of J.D. Power & Associates in Munich unveiled results of a recent survey showing escalating dissatisfaction among UK consumers over rising costs of electricity and natural gas supplied by utilities, the result of higher costs and taxes imposed by the government to promote alternative energy sources to oil and gas.

US inventories

The Energy Information Administration reported the injection of 19 bcf of natural gas into US underground storage in the week ended Nov. 11, well below the Wall Street consensus for a 27 bcf increase. That raised working gas in storage to 3.85 tcf. Gas stocks now are 14 bcf higher than a year ago in the same period and 224 bcf above the 5-year average.

EIA earlier reported commercial inventories of US crude dropped 1.1 million bbl to 337 million bbl last week. Gasoline increased by 1 million bbl to 205.2 million bbl in the same period. Distillate fuel inventories decreased by 2.1 million bbl to 133.7 million bbl (OGJ Online, Nov. 16, 2011).

Energy prices

The December contract for benchmark US sweet, light crudes jumped $3.22 to $102.59/bbl Nov. 16 on the New York Mercantile Exchange. The January contract escalated $3.17 to $102.60/bbl. On the US spot market, WTI at Cushing was up $3.22 to $102.59/bbl.

Heating oil for December delivery lost 3.67¢ to $3.13/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continued its climb, up 4.16¢ to $2.63/gal.

The December natural gas contract continued its fall, down 6¢ to $3.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., regained 1.2¢ to $3.11/MMbtu.

In London, the new front-month January IPE contract for North Sea Brent declined 30¢ to $111.88/bbl. Gas oil for December increased 50¢ to $994.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes inched up 7¢ to $112.26/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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