WASHINGTON: A deal to sell a US oil pipeline could sharply shift trade and even out the huge price divide between London and New York trade by freeing up more North American crude to the global market, analysts said.
In the deal announced Wednesday, Canadian oil and gas transport firm Enbridge said it is buying Conoco's 50 percent stake in the Seaway pipeline, for $1.15 billion.
The 330,000 barrel-per-day pipeline has moved oil from Freeport, Texas, on the Gulf of Mexico coast to the landlocked oil storage hub 800 kilometers (500 miles) to the north in Cushing, Oklahoma.
With Cushing backed up for most of 2011 due to rising inflows of oil from the north -- particularly Canada -- and distribution network bottlenecks slowing offtake inside the United States, the Seaway pipeline has been underutilized.
But Enbridge and its 50 percent partner in Seaway, Enterprise Product Partners, say they plan to reverse the pipeline to move oil from Cushing to the Gulf coast, starting in mid-2012.
That, analysts said, is likely to make more of the US benchmark crude, the light, sweet West Texas Intermediate, available to more buyers to the Gulf market, driving its price higher.
WTI prices in New York surged $3.22 dollars a barrel to $102.59 on Wednesday on the news, while the London equivalent, Brent North Sea, slipped 30 cents to settle at $111.88 a barrel in London.
Prices for the two key trading crudes of the West have moved further and further apart since the beginning of the year, when they were nearly at parity in the mid-90s.
A spread developed within weeks when the uprising against strongman Moamer Kadhafi cut off Libya's production, taking its light crude, valued by European refiners, out off the market. That pushed up Brent relative to the US WTI price by about $10.
Then mounting storage limitations and transport bottlenecks at Cushing in April and May led widened the spread. By August it hit $23, and in late September breached the $30 level.
The backup at Cushing, where WTI is stored and physically traded, marked a geopolitical shift in US oil trade. In the past much crude was imported through the Gulf coast and piped northward to Cushing and beyond.
Now Canadian oil, from its huge oil sands deposits, is gushing southward, forcing the need to find more ways, and cheaper ways, to take it beyond Cushing southward.
Analysts say the reversed Seaway pipe will make it cheaper to get crude from the north end down to the southern terminus. And they expect a lot of what is shipped south will be WTI crude.
“This year's disconnection of WTI prices is a clear example of how pipeline logistics can dislocate WTI not only from the rest of the world, but also from other US regions,” said Paul Horsnell and Amrita Sen at Barclays Capital.
“In the past, the main logistical bottlenecks impaired the market's ability to get enough oil into Cushing... The problem is now reversed: while the ability to get oil into Cushing has increased, the ability to shift this oil out of the region and to provide a relief valve for Cushing has been very limited.”Hence the promise of a new outlet for Cushing's brimming tanks was welcomed in the markets.
“It's a very big deal, because of the things that have led to the widening of Brent crude oil versus (WTI) futures here is the inability to move midcontinent oil directly via pipeline to the gulf,” said Andy Lipow of Lipow Oil Associates.
“It makes a big change because now you can move this very inexpensive oil to compete with imports,” he added.
But even as it enables shipping more northern crude to the Gulf, the new deal will leave it more exposed to the global market and prices -- pulling up the US benchmark while pulling down Brent in London.
JPMorgan raised its forecast for WTI prices to an average $110 a barrel in 2012 and $118 a barrel in 2013, while forecasting that the Brent price should come down to within $3-5 dollars of that.
“Ultimately, we see Brent-WTI trending towards a more stable relationship between $1 and $2 a barrel in 2014,” JPMorgan said.