It’s been a disappointing start of the year for those expecting to see the flowering of structural changes in WTI and WTI-Brent. Logistical and refinery developments had been expected to begin the process of unlocking crude oil trapped in the US Midwest from the start of this year. Markets had been pricing in a flatter WTI curve anticipating that record levels of Cushing crude oil inventories would begin to draw down as well as pricing in a narrower the WTI-Brent spread.
The front-month WTI discount to Brent had narrowed to around USD15/bbl in mid-January, the narrowest since late July 2012, with the forward curve pricing in a single digit spread. A series of disappointments starting with the Seaway pipeline has in recent weeks sent the WTI discount to Brent widening back out to more than USD20/bbl and forward spreads falling to double digit levels.
Late last month, the Seaway crude oil pipeline, which runs from Cushing, Oklahoma, (delivery point for WTI) to the US Gulf, was forced to limit its capacity to just 175kbd. Enterprise Products Partners and Enbridge Inc, joint owners of the pipeline, had earlier in January restarted the newly expanded 400kbd Seaway, which previously had a capacity of 150kbd. It was the start of the expanded Seaway that had fuelled expectations for a debottlenecking of crude oil out of the US Midwest.
Flows on Seaway have since increased and are heard to be flowing at above 200kbd, just around half of its capacity. A new pipeline connecting Seaway to refineries in Houston is expected to be completed in 2H – Q3 or early Q4 to be specific according to Enterprise – which should alleviate bottlenecks at Jones Creek, Texas, the pipeline’s terminus. This implies crude oil flows on the Seaway pipeline should be able to rise to its potential capacity level by then.
The latest hiccup for WTI was the delay of the start up of BP’s Whiting, Indiana, 260kbd distillation unit to July. The CDU – which had been shut since last November as part of a conversion process that was to enable the unit to run lower-cost heavy Canadian crude oil grades – had been expected to restart in April/May.The unit was to run light crudes until associated secondary units, including a coker, were brought online, which is now expected to occur in Q4 of this year.
Eventually, the Seaway pipeline and BP’s Whiting CDU will ramp up and this will lead to an increase in Cushing offtake capacity. These projects will be joined by other pipeline and rail developments, notably the Longhorn pipeline (225kbd capacity pipeline to carry Permian Basin oil from West Texas to the Gulf by mid-year).
These developments imply that the narrowing of the WTI-Brent spread should materialize from 2H 2013. That said, recent events remind us that logistical hiccups remain a key risk alongside the risk of US supply growth exceeding expectations and logistical capacity developments.
Source: Deutsche Bank