MARKET WATCH: Crude prices fall before pipeline fire tightens supply

Energy prices continued to fall with the front-month crude contract dropping nearly $4/bbl Nov. 28 on the New York Mercantile Exchange after federal officials reported the fifth draw on US oil supplies in 6 weeks.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 29 -- Energy prices continued to fall with the front-month crude contract dropping nearly $4/bbl Nov. 28 on the New York Mercantile Exchange after federal officials reported the fifth draw on US oil supplies in 6 weeks.

But even as analysts were saying the market's lost momentum would likely prevent another surge toward $100/bbl crude, an afternoon explosion and fire shut down the main pipeline that transports crude from Canada to Midwest refineries. Canada is the major source of oil imported into the US. As a result, crude prices spiked more than $4/bbl in overnight electronic trading.

Enbridge Energy Partners LP, Houston, said two employees died in an explosion and fire on its crude pipeline 3 miles southeast of its Clearbrook, Minn., terminal at 3:45 p.m. CST Nov. 28. All four Enbridge pipelines in that area were immediately shut down and isolated. That system transports some 1.5 million b/d or about 15% of total oil imports into the US.

The cause of the mishap is under investigation, and local authorities said it might take 3 days for the fire to burn out. Enbridge officials estimated "at least one or two" of the lines may be closed for an extended period. "The other two pipelines (with 646,000 b/d capacity) have resumed operations," said analysts Nov. 29 at the Houston office of Raymond James & Associates Inc.

The pipeline "most at risk to lengthy disruption is the 450,000 b/d line three," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The 670,000 b/d line four could probably suffer less lengthy delays. But the fire is still burning so making an exact call is difficult, and it will anyway cause serious disruptions to Petroleum Administration for Defense District 2 [encompassing the US Midwest] as it is occurring at the time that some refinery capacity is coming back on line in the region," he said.

Jakob added, "The oil that is being lost is not of a quality that can be delivered to the NYMEX contract, but it will have the knock-on effect of refineries pulling on storage volumes, which should keep a support on the West Texas Intermediate time spreads and reopen the Brent-WTI arbitrage."

Meanwhile, Jakob said, the supply disruption will likely prompt the US government to offer emergency supplies from the Strategic Petroleum Reserves and increases the probability that the Organization of Petroleum Exporting Countries will agree at their Dec. 5 meeting to increase production.

Energy prices
The January contract for benchmark US sweet, light crudes fell $3.80 to $90.62/bbl Nov. 28 on NYMEX. The February contract dropped $3.60 to $90.03/bbl. On the US spot market, WTI at Cushing, Okla., in PADD 2 was down $3.80 to $90.63/bbl. The December contract for reformulated blend stock for oxygenate blending (RBOB) lost 9.73¢ to $2.28/gal on NYMEX. Heating oil for the same month declined 7.96¢ to $2.57/gal.

The December natural gas contract fell 35.4¢ to $7.20/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., inched up 0.5¢ to $7.49/MMbtu. The Energy Information Administration said Nov. 29 that 12 bcf of natural gas was withdrawn from US underground storage during the week ended Nov. 11. That was below the consensus of Wall Street analysts and compared with an injection of 4 bcf the prior week and the withdrawal of 32 bcf in the same period last year. US gas storage now exceeds 3.5 tcf, up 106 bcf from year-ago levels and 301 bcf above the 5-year average.

In London, the January IPE contract for North Sea Brent crude dropped $2.71 to $89.81/bbl. Gas oil for December delivery fell $21.50 to $821.50/tonne.

The average price for OPEC's basket of 12 reference crudes declined by $2.19 to $88.08 on Nov. 28.

Contact Sam Fletcher at samf@ogjonline.com.

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