Bloomberg News

Oil Drops From 4-Month High as Seaway Capacity Limited

January 23, 2013

Oil dropped the most in a month in New York, widening its discount to Brent as capacity on the Seaway pipeline was reduced and the International Monetary Fund cut its global growth forecasts.

West Texas Intermediate oil tumbled 1.5 percent as capacity of the Seaway line, which runs from Cushing, Oklahoma, to the Gulf Coast, was limited to 175,000 barrels a day at the Jones Creek delivery point. The normal capacity is 400,000. Oil slipped earlier after the IMF lowered its world growth forecast to 3.5 percent from 3.6 percent in October.

“They are limiting the Seaway deliveries and the market is concerned that the glut in Cushing could build again,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The IMF forecast disappointed the market and the growth downgrade weighed on oil.”

WTI crude for March delivery fell $1.45 to settle at $95.23 a barrel on the New York Mercantile Exchange, the largest decline since Dec. 21. The February contract expired yesterday at $96.24, the highest close for a front-month contract since Sept. 17. Trading volume nearly doubled the 100-day average, heading for the highest level in almost a year.

Prices were little changed after the American Petroleum Institute reported oil inventories increased 3.17 million barrels last week to 364 million. Oil slid $1.10, or 1.1 percent, to $95.58 at 4:32 p.m. in electronic trading.

Brent Climbs

Brent for March settlement climbed 38 cents, or 0.3 percent, to $112.80 a barrel on the London-based ICE Futures Europe exchange. The volume of futures exchanged was 45 percent more than the 100-day average.

The European benchmark’s premium to WTI widened $1.83 to $17.57, the biggest increase since Nov. 15.

WTI’s drop “was triggered by the Seaway headlines,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “There will be less oil getting to the Gulf. Some refineries might have to cut back runs, which will hurt demand for WTI.”

Enterprise Products Partners LP (EPD:US) and Enbridge Inc. (ENB) limited capacity, owners of the pipeline, advised shippers that Seaway’s capacity limit is due to “unforeseen constraints in outbound takeaway.”

“This is giving more weakness to WTI and pressuring the Brent-WTI spread to the opposite direction,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors.

Seaway Restart

Enterprise and Enbridge restarted the Seaway line on Jan. 11, shipping oil from Cushing, the delivery point for New York oil futures, to the Gulf Coast, at a capacity of 400,000 barrels a day, up from 150,000 barrels. Shipments haven’t reached capacity, according to Genscape Inc., a Louisville, Kentucky, company that provides power supply information.

Stockpiles at the hub rose 1.78 million barrels to a record 51.9 million in the seven days ended Jan. 11, gaining for a sixth week, according to the Energy Information Administration, the Energy Department’s statistics arm. The opening of Seaway was expected to reduce Cushing’s total.

“If this backs up Cushing, that’s not going to be good, given where inventories are already,” said Andrew Lebow, a senior vice president at Jefferies Bache LLC in New York. “It could pressure the spreads further.”

Hussein Allidina, an analyst at Morgan Stanley (MS:US) in New York, forecast today that the premium will fall to as little as $6 by the end of the year.

IMF Projection

Oil fell in early trading as the IMF projected a second year of contraction in the euro region. It expects the 17- country euro area to shrink 0.2 percent in 2013, instead of growing 0.2 percent as forecast in October, as Spain leads the contraction and Germany slows.

U.S. oil stockpiles probably rose 2.15 million barrels to 362.5 million in the seven days ended Jan. 18, according to the median estimate of 10 analysts surveyed by Bloomberg before tomorrow’s report from the Energy Department. The industry- funded American Petroleum Institute is scheduled to release separate figures today.

“The market is waiting for tomorrow’s inventories data,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Oil’s rally to a four-month high is a little overextended and you may see some profit-taking.”

The relative-strength index of front-month oil futures rose above 74 today before ending the day at 65.7. RSI readings above 70 suggest prices will decrease, while figures below 30 can be buy signals.

“WTI had gone up so fast and so high, and this is the paring of positions coming into tomorrow’s inventory numbers,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

Electronic trading volume on the Nymex was 901,612 contracts as of 4:36 p.m., the first time it has surpassed 900,000 since Feb. 8. It totaled 529,234 contracts yesterday, 8.7 percent above the three-month average. Open interest was 1.49 million.

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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Companies Mentioned

  • EPD
    (Enterprise Products Partners LP)
    • $38.87 USD
    • -0.32
    • -0.82%
  • MS
    (Morgan Stanley)
    • $35.3 USD
    • -0.32
    • -0.91%
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