Bloomberg News

Oil Supplies Grow as Seaway Relief Valve Looms

May 22, 2012

Oil pipelines run near storage tanks at the Enbridge Inc. Cushing Terminal in Cushing, Oklahoma where stockpiles rose 1 million barrels to 45.1 million. Photographer: Shane Bevel/Bloomberg

Oil pipelines run near storage tanks at the Enbridge Inc. Cushing Terminal in Cushing, Oklahoma where stockpiles rose 1 million barrels to 45.1 million. Photographer: Shane Bevel/Bloomberg

U.S. oil inventories climbed for a ninth week, reaching a 21-year high, as growing production bolstered a supply glut in the days before the Seaway pipeline began to move crude to refineries along the Gulf Coast, a Bloomberg survey showed.

Stockpiles advanced 1.65 million barrels, or 0.4 percent, to 383.3 million in the seven days ended May 18, according to the median of 12 analyst estimates before an Energy Department report tomorrow. The increase would take supplies to the highest level since August 1990. Nine respondents forecast a gain and three saw a decline.

Oil has fallen 17 percent from its 2012 high as U.S. output surged to a 13-year peak. Inventories at Cushing, Oklahoma, the delivery point for New York futures, rose to a record in last week’s report. Enbridge Inc. and Enterprise (EPD:US) Products Partners LP reversed the flow of the Seaway pipeline and started shipping oil out of Cushing to the Gulf Coast on May 19.

“We are going to see the relief valve open up in next week’s inventory report,” said Phil Flynn, an analyst at futures brokerage PFGBest in Chicago. “The impact of domestic production is showing up in these record inventories.”

Crude oil for June delivery fell 91 cents, or 1 percent, to settle at $91.66 a barrel on the New York Mercantile Exchange. The contract expired today. Prices are down from $109.77 on Feb. 24, the highest close for 2012.

Stockpile Report

Inventories climbed 2.13 million barrels to 381.6 million in the week ended May 11, the highest level since August 1990, last week’s report showed. Stockpiles at Cushing rose 1 million barrels to 45.1 million.

The supply increases came as refineries operated at the highest production level in almost eight months. The utilization rate jumped to 88.3 percent in the week ended May 11 from 86.4 percent the previous week as plants returned to service after seasonal maintenance programs.

“We are seeing crude continue to build even with refinery utilization rates going so much higher,” said Jacob Corel, a commodity analyst at Summit Energy Inc. in Louisville, Kentucky. “There is just too much oil coming in right now.”

The Bloomberg survey showed that companies boosted operations to 88.6 percent of capacity last week.

“The completion of spring maintenance should cause oil stocks to fall and product stocks to rise beginning in late April and early May,” Tom Padlock, director of market research at Chicago-based Olive and previously an analyst at MF Global, said in a note to clients. “However, this year has been atypical.”

Oil Production

U.S. oil output has increased for three consecutive years as producers accelerated drilling with new techniques that made it possible to free hydrocarbons trapped in shale and tight rock formations.

Production rose to 6.15 million barrels a day in the week ended May 11, the most since February 1999, according to the Energy Department. Output was 9.5 percent greater than a year earlier. With the Seaway reversal, “Cushing inventories will draw down,” Corel said. “But at the same time there is a lot of crude production at the region and a lot is going to depend on flows into Cushing.”

Rising output from Canada’s oil sands has boosted supplies from the biggest U.S. source of foreign oil and helped raise inventories. Imports from Canada averaged 2.25 million barrels a day in the four weeks ended May 11, 14 percent more than a year earlier.

Supplies at Cushing

“There is still a lot of oil going into Cushing and a lot of Canadian oil sand production, so supply is going to continue to build up,” said Flynn, who predicted that Cushing inventories rose 1.5 million barrels last week. “The reversal of Seaway is historic.”

Enbridge (ENB) and Enterprise completed the Seaway reversal on May 17 and began accepting crude on May 19, according to the companies.

The 500-mile (805-kilometer), 30-inch Seaway line will initially be able to deliver 150,000 barrels per day, increasing to more than 400,000 in the first quarter of 2013, and the companies said in a statement last week.

The reversed line will supply refineries in Texas and Louisiana that account for about 35 percent of U.S. capacity, according to a filing from the companies with the Federal Energy Regulatory Commission.

Gasoline Stockpiles

Gasoline supplies probably fell 650,000 barrels to 203.7 million, the survey showed. Seven analysts forecast a decline and five expected a gain. Inventories slid 2.8 million barrels to 204.3 million in the week ended May 11.

Regular gasoline at the pump, averaged nationwide, fell 0.9 cent to $3.68 a gallon yesterday, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. It was the lowest level since Feb. 24. Prices have dropped 25.6 cents, or 6.5 percent, since reaching a 2012 high of $3.936 on April 4 as crude tumbled 8.8 percent.

Stockpiles of distillate fuel, including heating oil and diesel, dropped 500,000 barrels to 119.3 million. Eight analysts forecast a decline and four saw an increase. Distillates fell 969,000 barrels to 119.8 million in the week ended May 11.

The Energy Department is scheduled to release its weekly report at 10:30 a.m. tomorrow in Washington.

To contact the reporter 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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