US pipeline plan pushes oil futures above $100

Written by The Financial Times | Updated: Nov 18 2011, 06:15am hrs
By Gregory Meyer in New York and Jack Farchy in London

US crude oil futures sprang back above $100 a barrel on plans to reverse a key pipeline that would reconnect the supply of West Texas Intermediate to global markets.

Enbridge, a Canadian pipeline company, said it would pay ConocoPhillips $1.15bn to buy a 50 per cent stake in the Seaway pipeline and with co-owner Enterprise Products Partnersreverse it to run south from landlocked Cushing, Oklahoma, to the Gulf of Mexico.

The plan had important implications for energy markets. Elevated stocks in and around Cushing, the delivery point for West Texas Intermediate crude listed by CME Group, have caused the blend to suffer a severe discount to similar oil types, challenging its status as a benchmark.

The plan unveiled yesterday is the first to reverse an existing pipeline to help drain Cushings 32m barrels in inventories.

The bottleneck is being resolved, said Antoine Halff, economist at the Energy Information Administration in Washington. This is going to cause inventories to rebalance and prices to realign between inland and coastal locations.

US crude for December delivery rose 2.5 per cent to $101.89 a barrel, surpassing $100 for the first time since July. Brent, the benchmark linked to North Sea oilfields, fell 0.4 per cent to $111.75. Last month the US benchmark briefly dipped to a $28-a-barrel discount to Brent. Andy Lipow, president of consultants Lipow Oil Associates in Houston, said: The spread could continue to narrow as any crude oil inventory overhang is moved down to the Gulf coast.

Betting on the spread has become a popular trade among hedge funds and trading houses, with some analysts arguing that the glut around Cushing could cause the spread to blow out to more than $40.

The pipeline plans also hit shares of US refining companies that have enjoyed discounted oils linked to Cushing. CVR Energy fell 12 per cent, HollyFrontier was down 7.7 per cent and Western Refining dropped 10.5 per cent.

For Midwest refineries, its welcome back to reality, said Michael Wittner, head of oil research at Socit Gnrale.

Enbridge and Enterprise said that the reversed line could carry 150,000 barrels a day by the second quarter of 2012. By early 2013, capacity would rise to 400,000 b/d.

As the US state department extends a review of TransCanadas Keystone XL oil pipeline from Canadas oil sands region to Texas amid environmental concerns, the Seaway project could help deliver similar crude to Texas by a different route. Cushings stocks have soared with an influx of supplies from Canada, the USs largest foreign crude supplier, and the Bakken region of North Dakota.

Enbridge and Enterprise are also jointly pursuing plans to build a new, 800,000 b/d pipeline from Cushing to Houston called Wrangler.

The Financial Times Limited 2011