Bloomberg News

Crude Declines on Speculation Seaway Reversal Won’t End Glut

November 20, 2011

Nov. 18 (Bloomberg) -- Oil in New York declined, widening its discount to Brent crude, on speculation that the reversal of the Seaway pipeline won’t be enough to eliminate a glut in the U.S. Midwest.

West Texas Intermediate oil fell more than Brent two days after Brent’s premium sank to an eight-month low when Enbridge Inc. and Enterprise Products Partners LP said they will reverse the direction of the pipeline, sending crude from Cushing, Oklahoma, to the Gulf Coast. WTI is the New York benchmark.

“People realized that they overreacted when the Seaway pipeline news was announced,” said Phil Flynn, an analyst with PFGBest in Chicago. “One pipeline isn’t enough to alleviate the glut and the reversal isn’t necessarily a bullish event.”

Crude for December delivery dropped $1.41, or 1.4 percent, to settle at $97.41 a barrel on the New York Mercantile Exchange. For the week, crude fell $1.58, or 1.6 percent, the first decline in seven weeks. The December contract expired today. The January contract, which traded at nine times the volume of December, fell $1.26 to $97.67.

Brent oil for January settlement fell 66 cents, or 0.6 percent, to $107.56 a barrel on the London-based ICE Futures Europe exchange.

Brent’s premium to WTI rose 60 cents to $9.89 a barrel. The spread, which reached a record of $27.88 on Oct. 14, dropped to $9.28 from $13.02 on Nov. 16 after Enbridge’s announcement. The reversal will add an outlet to transport oil from the central U.S. and Canada to the coast of the Gulf of Mexico.

“We might have overdone it and seen the spread come in too much,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “You will need a structural change to end the glut.”

‘Need More Pipelines’

The Seaway pipeline will operate with an initial capacity of 150,000 barrels a day by the second quarter of 2012, the company said. Pump modifications expected to be completed by early 2013 will boost daily capacity to 400,000 barrels.

“People are worried about the downside,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The reversal is not going to happen until next year.”

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.

“The Seaway pipeline doesn’t solve the whole problem and we need more pipelines to carry oil away from Cushing,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. “The market is reassessing the impact of the pipeline.”

Cushing Inventories

Inventories in Cushing, the delivery point for U.S. futures, gained 2.9 percent in the week ended Nov. 11 to 32 million barrels, according to the Energy Department. Stockpiles have increased 6.3 percent since they reached 30.1 million barrels on Sept. 30, the lowest level in more than six months.

“The reversal of the pipeline might be a more bearish event than the way the market reacted the first day,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “It allows access to high-quality crude for all Gulf Coast refineries.”

Oil may fall next week, according to a Bloomberg News survey. Eighteen of 36 analysts, or 50 percent, forecast oil will drop through Nov. 25. Eleven, or 31 percent, predicted a gain, and seven, or 19 percent, said there will be little change.

Earlier Gain

Futures gained earlier on signs the U.S. economy will keep growing and as the euro strengthened against the dollar amid speculation that European Central Bank purchases of government bonds will stem surging borrowing costs.

The index of U.S. leading indicators climbed more than forecast in October. The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York-based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

The ECB bought Spanish and Italian debt today, said at least three people with knowledge of the trades who declined to be identified.

The euro gained as much as 1.2 percent against the dollar after weakening yesterday to its lowest rate in more than a month. A weaker dollar increases the appeal of commodities priced in the U.S. currency.

Oil volume in electronic trading on the Nymex was 635,816 contracts as of 3:54 p.m. in New York. Volume totaled 919,012 contracts yesterday, 36 percent above the three-month average. Open interest was 1.31 million contracts, the lowest level since Aug. 30, 2010.

--With assistance from Justin Doom in New York. Editor: Richard Stubbe, Bill Banker

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net;

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


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