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January 17th, 2013

Seaway Pipeline Reversal Complete

by Andrew Price, President & COO

Enterprise Products Partners and Enbridge recently completed an expansion of the 500 mile, 30 inch, Seaway pipeline that runs from Cushing. Oklahoma to Freeport, Texas. Cushing is the delivery point for the New York Mercantile Exchange (NYMEX) crude oil futures contract.  The Seaway pipeline carried imported crude north from the Gulf Cost to Cushing until May 2012. The pipeline was reversed in 2012 and began carrying crude south from Cushing to the Gulf Coast, home to about half the refining capacity in the US.  Seaway’s capacity has increased from 150,000 barrels per day to 400,000 barrels per day and will help reduce the discount of West Texas Intermediate (WTI) Crude to London traded Brent Crude, the most common oil benchmark used worldwide.

WTI is a higher quality oil grade than Brent and has typically traded at a small premium to Brent. WTI averaged more than $1.00 per barrel more than Brent from 2000 to 2010. In 2011, the traditional relationship between the two benchmarks began to reverse as a glut of crude oil began to flow into Cushing from new shale oil resources in North Dakota.

Storage capacity for crude at Cushing quickly became scarce as oil inflow rapidly exceeded pipeline take-away capacity. At one point, WTI dropped as low as $28 per barrel below Brent, due to the surge in US production and the resulting glut in supplies at Cushing.

Although supplies at Cushing increased to a record 50.1 million barrels in the week ended Jan. 4, the price gap has been narrowing. The price spread between WTI and Brent oil was a little under $15 per barrel on January 17, the lowest price spread since July, 2012, as traders anticipate the impact of the Seaway reversal.   

The shale oil boom has been created by hydraulic fracturing, the same technology that has unlocked enormous new natural gas resources in the US. Oil production in the US increased to 7 million barrels a day in the week ended Jan. 4 according to the US Energy Information Administration. This is the highest level since March 1993.

The Seaway pipeline is planning to more than double delivery capacity from Cushing to the Gulf Coast to 850,000 barrels a day by early 2014. Other pipelines are also getting in the game. The southern portion of the Keystone XL Pipeline, owned by Transcanada, hopes to be shipping 700,000 barrels a day from Cushing to Texas by late 2013.  This new pipeline capacity will help narrow the gap between WTI and Brent by alleviating the bottleneck at the Cushing pricing hub. The EIA forecasts that the spread between WTI and Brent will average $16 a barrel in 2013 and $8 in 2014.

(Tags: Crude Oil, West Texas Intermediate (WTI), Brent, Seaway)

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