Bloomberg News

Oil in New York Surges Above $100 on Reversal of Seaway Pipeline

November 17, 2011

Nov. 16 (Bloomberg) -- Oil in New York climbed above $100 a barrel to a five-month high as Enbridge Inc. said it would reverse the direction of the Seaway pipeline, adding an outlet for crude from the central U.S. and Canada.

Futures rose as much as 2.9 percent after Enbridge agreed to acquire ConocoPhillips’s share of the pipeline that runs between Cushing, Oklahoma, and the Gulf Coast and announced the reversal. The change may alleviate a bottleneck at the Cushing storage hub that had lowered the price of West Texas Intermediate, the grade traded in New York, versus other oils.

“In the short term, this will definitely clear some of the crude out of Oklahoma,” said Francisco Blanch, head of commodities research at Bank of America Corp. in New York. “This may not be enough to eliminate the glut in the Midwest because output is growing by hundreds of thousands of barrels a year. We still need additional transportation capacity.”

Crude oil for December delivery rose $2.25, or 2.3 percent, to $101.62 a barrel at 11:56 a.m. on the New York Mercantile Exchange. Futures reached $102.29, the highest level since June 9. The contract traded at $99.70 before the Seaway announcement.

Brent oil for January settlement dropped 64 cents to $111.54 a barrel on the ICE Futures Europe exchange in London. The European contract’s premium to West Texas crude narrowed to as little as $8.32 a barrel, the smallest spread since March 9. The spread surged to a record high of $27.88 on Oct. 14.

Initial Pipeline Capacity

The pipeline will operate with an initial capacity of 150,000 barrels a day by the second quarter of 2012, according to a company statement. Enbridge will jointly own the link with Enterprise Products Partners LP, the operator, according to a statement today.

The reversal will enable more oil from Canada and North Dakota to reach the Gulf Coast, home to about half of U.S. refining capacity. Rail and barge projects that are planned, proposed or under construction may boost North Dakota’s oil- loading capacity by 450,000 barrels a day next year, Goldman Sachs Group Inc. said in an Oct. 4 report.

The reversal “will definitely reduce the amount of rail and barge that is needed,” said Hussein Allidina, the head of commodity research at Morgan Stanley in New York. “You are still going to evacuate some crude via some of these higher costs transportation means” as Canadian and U.S. output rises.

The U.S. State Department announced Nov. 10 it was delaying a decision on TransCanada Corp.’s proposed Keystone XL oil pipeline to study an alternative route for the $7 billion project that avoids environmentally sensitive areas in Nebraska. The 1,661-mile (2,673-kilometer) link would deliver 700,000 barrels a day of crude from Alberta’s oil sands to the Gulf.

‘The Bottom Line’

“The reversal of the Seaway is not enough,” Blanch said. “We will still need to see the Keystone pipeline built along with additional projects.”

Oil in New York has surged 36 percent since touching $74.95 a barrel on Oct. 4, the lowest intraday price since Sept. 24, 2010. Prices tumbled 17 percent in the third quarter, the biggest quarterly decline since the financial crisis in 2008 on concern that the economies of the U.S. and Europe would slow, curbing fuel consumption.

“Prices have climbed almost 40 percent in a very short time,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “I wouldn’t be surprised if there’s a short- term pullback. Once that occurs, there’s no reason to think we won’t resume this move higher.”

Oil briefly pared gains after the U.S. Energy Department reported that crude supplies at Cushing rose 890,000 barrels to 32 million last week.

Getting Trumped

“The inventory numbers are being trumped by the announced reversal of the Seaway pipeline,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “There won’t be any major impact until the second quarter of next year. It certainly makes sense to reverse the pipeline but it’s not a game changer.”

Total crude oil stockpiles fell 1.06 million barrels to 337 million in the week ended Nov. 11, according to the report released at 10:30 a.m. in Washington. A decline of 1.2 million barrels was expected, according to the median of 13 analyst responses in a Bloomberg News survey.

Gasoline supplies rose 992,000 barrels to 205.2 million last week, the report showed. A 1 million-barrel decline was forecast, according to the Bloomberg News survey. Inventories of distillate fuel, a category that include heating oil and diesel, fell 2.14 million barrels to 133.7 million. Stockpiles were projected to drop 2.35 million barrels.

--With assistance from Aaron Clark in New York. Editors: Richard Stubbe, David Marino

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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