US crude rises on US pipeline reversal plan

This could be it- watch for WTI crude to converge to Brent.
My guess is that WTI rises to meet Brent at around 120+

The pipeline was scheduled to open June 1.
This moves it up to May 15th or so.

NYMEX-US crude rises on US pipeline reversal plan

By Randy Fabi

April 1 (Reuters) — U.S. crude oil prices rose above $103 a barrel on Tuesday in response to news that a plan to drain off a glut of oil from the Midwest could be implemented two weeks ahead of schedule.

FUNDAMENTALS

* NYMEX crude for May edged up 28 cents to $103.20 a barrel by 2306 GMT, adding to a 10 cent gain the previous session.

* Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline by mid-May pending regulatory approval, allowing the line to start draining the glut of crude from the U.S. Midwest two weeks ahead of schedule.

* Iran is ready to resolve all nuclear issues in the next round of talks with world powers if the West starts lifting sanctions, its foreign minister said on Monday.

* U.S. commercial crude stockpiles were forecast to have risen 1.6 million barrels last week after data showed the largest three-week build in more than three years due to higher imports, a preliminary Reuters poll showed on Monday. The American Petroleum Institute will release its report later on Tuesday.

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28 Responses to US crude rises on US pipeline reversal plan

  1. Steve says:

    The End of the Saudi Oil Reserve Margin
    Posted by editor on April 4th, 2012 07:54 AM | Wall Street Journal

    Riyadh is less and less able to cushion supply shocks as it consumes more and more of its own oil.
    By JIM KRANE

    Doha, Qatar

    President Obama’s sanctions plan on Iran follows an old Mideast policy playbook. Western moves against an oil-exporting country take place with the cooperation of Saudi Arabia. U.S. strategy requires the Saudis to ramp up production and replace Iranian exports in hope of avoiding a damaging spike in prices.

    It’s a familiar scenario: At one time or another, the Saudis have been called upon to replace exports from Iran, Iraq, Kuwait and, most recently, Libya. The idea is to have your cake and eat it—to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist.

    But the old playbook may have to be torn up. This time Saudi Arabia is struggling to assume its usual role as the oil market’s swing supplier. This can be seen in current market tightness and in U.S. gasoline prices, which are edging toward $4, a dangerous prospect at election time.

    The Obama administration’s sanctions plan acknowledges Saudi weakness. Rather than try to impose a blanket ban, it has introduced piecemeal measures, such as encouraging China and South Korea to demand discounts for continued imports of Iranian crude. For the first time, Saudi Arabia’s vaunted spare capacity appears insufficient to cover the loss of a major exporter.

    When revolution last year took Libya’s 1.5 million barrels a day off the market, the Saudis and other producers were able to fill the gap. A slack oil market helped. But Iran has been exporting roughly 2.2 million barrels a day. And now something else is afoot.

    Saudi Arabia isn’t the same depopulated petro-state that the West found itself so dependent on in the 1970s. The kingdom and its oil-rich neighbors have seen their populations and industrial bases swell. They have become huge consumers of their own energy. The ruling sheikhs have cemented themselves in power by erecting energy-driven welfare states which provide some of the world’s cheapest electricity, natural gas and gasoline.

    With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil production—nearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large.

    In the medium-term, Saudi Arabia is in danger of losing its all-important “reserve margin” of oil production that so often calms market volatility. Loss of this spare capacity would remove a crucial safety mechanism from the global economy, to say nothing of tying America’s hands when it comes to future moves against oil states.

    Longer-term, the kingdom’s very exports are at risk. A projection by Jadwa Investment of Riyadh shows that, at current rates of consumption growth, the Saudi reserve margin will dwindle until it disappears sometime before 2020. At that point, the Saudis would begin diverting oil destined for export into the domestic market.

    Following the trend further, Jadwa finds that Saudi Arabia will consume its entire production capacity of 12.5 million barrels per day at home by 2043. London’s Chatham House finds that the kingdom will become a net oil importer even earlier, by 2038.

    These projections don’t take into account the possibility that Saudi Arabia’s production could rise above an expected plateau of 13 million barrels a day, or that ruling sheikhs might stop encouraging their citizens to waste energy by dropping some of the world’s deepest fossil-fuel subsidies.

    As U.S. drivers are now learning, however, the Gulf countries have limited ability to increase production beyond current capacity, and they show even less ability to curb their domestic demand. When it comes to competition for supply, they will retain a natural advantage. They own the supply.

    America’s Middle East confrontations have long depended on Saudi spare capacity. Without it, as the faceoff with Iran already shows, Washington—and the world—will be less free to intervene in the region without raising gasoline prices at home. And unless the Gulf Arab monarchies can gain control of their own consumption, their role in global energy markets will dwindle, as prices grow even more volatile.

    Mr. Krane is the author of “City of Gold: Dubai and the Dream of Capitalism” (St. Martin’s Press, 2009). He researches Gulf energy policy at Camb

    Reply

  2. Zaid says:

    There’s also the expansion of Motiva’s Port Arthur refinary, which will add 400,000 barrels/day refining capacity for heavy crude. This will open up another channel for Saudi excess capacity, which as you know is primarily heavy crude, a high-sulfur variant that most refineries in the Gulf Coast are not designed to process.

    Also consider that Saudi restricts sales to refiners only; so even if Saudi has the excess capacity, it will not sell to speculators at its posted prices, crippling its ability to set prices as the world’s central bank of oil.

    Reply

  3. Matty says:

    Warren, if the added demand is likely to be 150k BBL/Day ramping to 400k, how will this resolve the 1mm BBL/day of midwest oil production in the short term?

    the additional marginal demand is enough to move the price?

    Reply

    WARREN MOSLER Reply:

    it’s about a 1 million barrel per week outflow.

    over the last 6 months cushing inventories haven’t risen at that pace, so seems there will be a drain over time.

    Reply

  4. pebird says:

    @SteveK9, When I was a kid learning econ, I could never reconcile the supply/demand concept with my understanding of quantity discounts.

    Then someone hit me over the head with micro vs. macro. Now I am just trying to figure where micro ends and macro takes over.

    Reply

    Art Patten Reply:

    @pebird,

    “Now I am just trying to figure where micro ends and macro takes over.”

    The whole profession is (save those who’d rather pretend it’s all micro). This was a (the?) primary aim of Keynes’ GT if I’m not mistaken.

    Reply

  5. Chris Cook says:

    My guess is that WTI and Brent converge around $80/bbl by July if they can keep a floor under the wave of selling or around $50 if they can’t.

    There is only residual Iran fear holding this market up, and at the end of May that will IMHO evaporate.

    Reply

  6. JBH says:

    WTI and Brent have always had a price differential. Why would it go away?

    Reply

    WARREN MOSLER Reply:

    wti used to trade at a premium to brent due to shipping charges

    Reply

  7. jcmccutcheon says:

    This could be it- watch for WTI crude to converge to Brent.
    This could be what ? Bombing Iran (as Neal sug.)?

    Reply

    WARREN MOSLER Reply:

    no, just that the pipeline guy will out bid the pad II refiners until he gets the price up closer to brent

    Reply

    Zaid Reply:

    @WARREN MOSLER, So short LLS long WTI should be a low risk pair.

    Reply

    WARREN MOSLER Reply:

    yes, though I like being long wti only as a hedge against sudden price spikes.

    I agree there’s a chance the Saudi’s don’t have the excess capacity they claim they have,
    and in any case if Iranian crude is cut off prices could go substantially higher

  8. Ryan says:

    Kinder Morgan is expanding a pipeline going from Edmonton to Seattle and Vancouver terminals. That should help raise the Midwest price too because Canada will have more options for their oil.

    http://fuelfix.com/blog/2012/04/13/kinder-morgan-to-expand-canada-pipeline/

    Reply

  9. walter says:

    Will make USD ‘easier to get’ and thus drive down USD?

    Reply

    WARREN MOSLER Reply:

    if we pay more for imported crude from Canada, it would have that effect.

    Reply

  10. SteveK9 says:

    Missing something, increased supply –> increased prices?

    Reply

    Tom Reply:

    “news that a plan to drain off a glut of oil from the Midwest could be implemented two weeks ahead of schedule.”

    Steve, the glut is in Cushing,Oklahoma, where WTI price is determined, so as it’s moved away, supply goes down..price goes up. Sending the oil to the Gulf.

    -Tom

    Reply

    SteveK9 Reply:

    @Tom, Odd. Sending oil from an oversupplied region (OK) to an undersupplied region (Gulf) doesn’t sound like a mechanism for raising the average? price. Have no idea how WTI price is determined. Local supply and demand would seem to have little to do with it, or a ‘glut’ would cause prices to drop.

    Don’t feel the need to educate me. Embarrassing I guess, since I used to work for Schlumberger (scientist though).

    Reply

    roger erickson Reply:

    @SteveK9,

    The bigger scenario is that the Obama Administration may still be seriously planning on bombing Iran. Building up stockpiles, and improving their distribution would make sense. This could still go either way.

    Reply

    SteveK9 Reply:

    @roger erickson, A bit convoluted for me.

    Reply

    roger erickson Reply:

    @SteveK9, when changing don’t fit your explanations, looking for extenuating explanations

    Midwest oil glut, expanding reserves, distributing oil reserves … why?

    DoD or another federal agency may well have asked for the pipeline owner to reverse flow; someone should have; policy permission to actually do so however, eventually came through some agency that is itself inevitably under political influence

    Matt Franko Reply:

    @SteveK9, Not with moron monopolists… Resp,

    Reply

    Yuu Kim Reply:

    @SteveK9,

    same here…

    Reply

    WARREN MOSLER Reply:

    with the new pipeline flowing oil at cushing has the option of being sold into markets that have brent levels of pricing.

    cushing is about the only place deeply discounted due to supply issues the new pipeline alleviates

    Reply

    SteveK9 Reply:

    @WARREN MOSLER, Thanks. Should have read down first.

    Reply

    Art Patten Reply:

    @WARREN MOSLER,

    “with the new pipeline flowing oil at cushing has the option of being sold into markets that have brent levels of pricing”

    Assumes Brent levels steady from here — eurozone recession risk versus Mideast supply pressures?

    Reply

    WARREN MOSLER Reply:

    yes. I’m guessing brent holds around 120 or more. but i could be wrong on that.
    meanwhile the wti/brent spread is narrowing, as expected.

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