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WTI vs Brent

Posted by WARREN MOSLER on December 28th, 2012

The days are numbered before WTI converges up to Brent.
The discount is now less than $20.

$110 WTI will take away competitive advantages of those now able to use Cushing oil, etc.

Enterprise to expand Seaway pipeline to 850,000 bpd

December 17 (Reuters) — Enterprise Products Partners LP and partner Enbridge Inc plan to expand the Seaway pipeline to transport 850,000 barrels a day of crude between Oklahoma and southern Texas during the first quarter of 2014, an Enterprise spokesman said on Monday.

Seaway, a 150,000 barrel per day line that was reversed earlier this year to ship crude 500 miles southward from Cushing, Oklahoma, to Houston, Texas, will be expanded to run 400,000 barrels per day as of next month, according to a recent filing by Enterprise to the U.S. Federal Energy Regulatory Commission. The plans detailed in the filing were confirmed by Enterprise spokesman Rick Rainey.

A further expansion to 850,000 barrels per day is scheduled to take place in the first quarter of 2014, after a new twin line with capacity of 450,000 bpd is built parallel to the existing Seaway line, Rainey said.

35 Responses to “WTI vs Brent”

  1. Ed Says:

    can u elaborate a bit why shipping from cushing to tx will increase the price of wti?

    is it that once it hits the gulf,they will export it to countries using brent? or
    does tx now import brent to refine and will switch to wti to refine instead, driving significant usage of wti?

    thks

    Reply

    WARREN MOSLER Reply:

    if you can buy cheap in one market and sell dear in another in enough size you’ll equalize the prices.
    that’s why the price is pretty much the same everywhere in the world except Cushing, where there is a supply ‘imbalance’.

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    are WTI and Brent of the same quality?

    Reply

    WARREN MOSLER Reply:

    yes

    Ed Reply:

    @WARREN MOSLER, i assume that means the wti headed for tx gulf is to export at higher prices and not refining for domestic use, right?

    Reply

    kris Reply:

    @WARREN MOSLER,

    I thought exporting crude from USA was forbidden.
    I think it still is.

    Reply

    Ed Reply:

    @kris, news to me, but you can find a chart on the eia.gov website that tracks exports. seems we’ve been averaging 10-15m/brls-year on exporting.
    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrexus1&f=m
    although it appears a slight avg increase since may.

    will be interesting to keep an eye on this trend once seaway goes upto 450k/800k bpd.

    kris Reply:

    @kris,

    Ed
    http://www.forbes.com/sites/timworstall/2012/11/08/should-the-us-allow-crude-oil-exports-obviously-clearly-yes/
    It seems that permission is required. It’s not freely exported.

    Ed Reply:

    @kris, interesting. apparently the permission is directly from the president. i’ll guess if they can get 110 on world market vs 90, they figure a way to lobby and get the permission, in the name of free markets of course. why should the u.s. get to consume for a discount vs. whats better for the country seems to be the argument.

    kris Reply:

    @kris,

    Mr Rombach
    In my opinion, there is no way, none whatsoever, zero, nada, zilch, that Obama will allow wti match brent.
    Politically is a real suicidal.

    Ed Reply:

    @kris, not that i’m anxious to see it go to 110, but i don’t know if it would rise to the level of political catastrophe,in light of all the other political issues at the forefront. but given that oil has been in 70-110 range for the last 2 years, a case could be made 110 would just be the high end of the “new norm”….arggghh. 110ish (or convergence to brent price) was warrens perspective at the top of the post.

    here’s a thought…..once they get the seaway upto 850k/bpd they’ll start shipping out the oil, filling pockets of those involved, while telling people cushing is bone dry because of our massive consumption….hope i’m wrong…but

    two other instances come to mine. 1) a while back i remember hearing they were keeping tankers parked off shore to keep supplies tight (i think it was around oil peak in 2008) or like enron when calif was “running out of electricity” due to their massive consumption…just more ways to game the system sometimes
    cheers

    kris Reply:

    @kris,

    Mr Rombach
    Wouldn’t you think that supplying more oil to brent would actually reduce the price? You know, supply/demand?

    Ed Reply:

    @kris, hey kris, btw, i’m not ed rombach, different ed…:-)

    but just below this post ed r does ask the same question, about brent coming down. i guess thats possible too. there’s just a lot of emotion in crude no matter what the fundamentals tell you….:-)

    kris Reply:

    @kris,

    Sorry to both of you.

  2. Ed Rombach Says:

    “The days are numbered before WTI converges up to Brent.”

    It’s not intuitively obvious to me why this development necessarily means that WTI will converge upward to Brent. Alternatively, couldn’t Brent converge down to WTI!

    Reply

    kris Reply:

    @Ed Rombach,

    This seams a lot more probable to me.

    Reply

    Ed Rombach Reply:

    @kris,

    I think you may be mixing me up with the other Ed on some of the earlier posts.

    Reply

    kris Reply:

    @Ed Rombach,
    Sorry

  3. Anders Says:

    There are a regular stream of announcements of new infrastructure projects to get crude to the Gulf Coast. They usually seem to get delayed; and as inland production capacity keeps increasing, the level of additional pipeline capacity required keeps growing.

    So this announcement in itself doesn’t seem to indicate the WTI discount will vanish – although the discount shrinking below $20 probably means that market is bullish on the capacity being delivered on time…

    Reply

    WARREN MOSLER Reply:

    understood, thanks

    Reply

  4. Roger Says:

    Assuming the product is the same and fungible, the price difference will equate the basis cost to delivery to the higher points. Otherwise there is arbitrage which should not exit but a split second.

    What Warren is reporting is why I always argue with people that domestic drilling does not directly benefit us as far as the price we pay for oil products. Oil is priced on world markets and that is what we will pay. These development will make it more so with respect to the USA by making the products physically be able to go other places easily.

    Reply

    Ed Rombach Reply:

    @Roger,

    Maybe we in the US should produce nothing and let everyone else in the rest of the world send us everything they cannot afford to consume?

    Reply

    Roger Reply:

    @Ed Rombach,

    US production is not going to make a material change to supply, therefore price. Therefore, no gain to consumer by tapping it. In the mean time, we are depleting a physical resource that if the rest of the world runs dry, will lead to war. Wouldn’t it be better to have it near here if that happened. Instead we could put real resources into perfecting alternative energy, which, when they happen on a large scale, will be the biggest wealth creator ever seen to that point, just as all the other energy paradigm shifts were. I would like it to happen here.

    I want to add a quote by Thomas Edison that is parallel to the point I am making:

    Some day some fellow will invent a way of concentrating and storing up sunshine to use instead of this old, absurd Prometheus scheme of fire. I’ll do the trick myself if some one else doesn’t get at it. Why, that is all there is about my work in electricity—you know, I never claimed to have invented electricity—that is a campaign lie—nail it!”

    “Sunshine is spread out thin and so is electricity. Perhaps they are the same, but we will take that up later. Now the trick was, you see, to concentrate the juice and liberate it as you needed it. The old-fashioned way inaugurated by Jove, of letting it off in a clap of thunder, is dangerous, disconcerting and wasteful. It doesn’t fetch up anywhere. My task was to subdivide the current and use it in a great number of little lights, and to do this I had to store it. And we haven’t really found out how to store it yet and let it off real easy-like and cheap. Why, we have just begun to commence to get ready to find out about electricity. This scheme of combustion to get power makes me sick to think of—it is so wasteful. It is just the old, foolish Prometheus idea, and the father of Prometheus was a baboon.”

    “When we learn how to store electricity, we will cease being apes ourselves; until then we are tailless orangutans. You see, we should utilize natural forces and thus get all of our power. Sunshine is a form of energy, and the winds and the tides are manifestations of energy.”

    “Do we use them? Oh, no! We burn up wood and coal, as renters burn up the front fence for fuel. We live like squatters, not as if we owned the property.

    “There must surely come a time when heat and power will be stored in unlimited quantities in every community, all gathered by natural forces. Electricity ought to be as cheap as oxygen, for it can not be destroyed.

    “Now, I am not sure but that my new storage-battery is the thing. I’d tell you about that, but I don’t want to bore you.

    Reply

    Ed Rombach Reply:

    @Roger,

    “US production is not going to make a material change to supply, therefore price.”

    From the NYT Nov 12: “The United States will overtake Saudi Arabia as the world’s leading oil producer by about 2017 and will become a net oil exporter by 2030, the International Energy Agency said Monday.”

    http://www.nytimes.com/2012/11/13/business/energy-environment/report-sees-us-as-top-oil-producer-in-5-years.html?_r=1&

    “Therefore, no gain to consumer by tapping it. In the mean time, we are depleting a physical resource that if the rest of the world runs dry, will lead to war.”

    As the US develops its own vast domestic oil/gas natural resources it diminishes the chances of being dragged into another war over oil in the Middle East.

    “Wouldn’t it be better to have it near here if that happened. Instead we could put real resources into perfecting alternative energy, which, when they happen on a large scale, will be the biggest wealth creator ever seen to that point, just as all the other energy paradigm shifts were. I would like it to happen here.”

    What kind of alternative energy resources do you have in mind? If you are thinking solar and wind, then wake me when those two technologies can be competitive with oil and natural gas…. and yes coal also. However, if by alternative energy you have thorium fission energy and/or thermonuclear fusion energy in mind, then I am all in favor.

    Tom Hickey Reply:

    @Ed, What kind of alternative energy resources do you have in mind? If you are thinking solar and wind, then wake me when those two technologies can be competitive with oil and natural gas…. and yes coal also.

    Add in negative externalities and alternatives already are wildly competitive in cost/benefit. Based on analysis wrt ecological economics, the matter becomes even more biased toward renewable and sustainable energy sources.

    But this requires scientific inquiry in addition to economics, which most mainstream economists ignore. The public implicitly realizes that tackling these difficult issues is going to require significant change and there is a strong bias against change. People are only open to significant change when they are convinced that the not changing is far worse alternative. That realization is now beginning to dawn on the population at large.

    Roger Reply:

    I suspect that and similar hype articles are based on possible reserves not production.

    Shale oil is nothing new. Industry always knew that oil was there. Western states went through the craze decades ago. The problem is the cost, not dollars, by real physical cost to get. It takes energy to produce energy and in the case of shale oil, a lot of energy. It is very inefficient and the net energy gain is fractions of the energy needed in production of it. I will have to look it up but it is around 15-20% maybe worse in some spots – in other words for 100 units of energy produced you have to expend 80-85 and the more unconventional the drilling becomes the worse that ratio gets until it quickly turns negative. This is the heart of what peak oil is and why the US peaked in the early 1970s.

    Ed Rombach Reply:

    @Ed Rombach,

    “Add in negative externalities and alternatives already are wildly competitive in cost/benefit. Based on analysis wrt ecological economics, the matter becomes even more biased toward renewable and sustainable energy sources.”

    Tom Hickey – Show me your data.

    Reply

    Tom Hickey Reply:

    @Ed Rombach,

    Short answer. It’s an estimate but based on a rationale.

    The True Cost of Oil: $65 Trillion a Year

    Ed Rombach Reply:

    @Ed Rombach,

    Tom Hickey – That was certainly an exhaustive and all encompassing way of accounting for the “true” cost of producing petroleum derivative products like gasoline, diesel fuel, jet fuel and heating oil, but I’m not enough of an accountant to judge whether Chris Nelder’s methodology can be construed to be in sync with generally accepted accounting principals. That said, I reckon a similar account method could be applied to almost any modern industrial product resulting in findings that the product is uneconomical.

    Regarding relative economic viability of alternative forms of energy, I am thinking in terms of energy density which is the amount of energy stored in a given system or region of space per unit volume. In this context, gasoline trumps solar panels. I wish it was the other way around because I don’t like CO2 emissions and smog and I look forward to advanced applications of thorium fission the thermonuclear fusion for real high density game changing energy solutions to economic underdevelopment.

    So, in terms of energy density fusion > thorium fission > conventional fission > petroleum products > solar/wind power. Not sure though if burning wood represents more or less energy density than solar/wind power.

    Tom Hickey Reply:

    @Ed Rombach,

    The other issue is total carbon footprint of a product. Some “energy-saving” devices and renewable equipment takes a lot of carbon to produce.

    This is a huge field that is underreported and understaffed. We need to be putting a lot more attention in this direction. I suspect that the most well-informed people are in the militaries and energy companies and they aren’t saying all that much.

    What I do know is that the cost of carbon in terms of quality of life is a lot larger than most people realize. About 2/3 of the US population is living in areas of pollution to be high enough to be damaging to health. The pollution is nano-particles hence undetectable by the senses. There’s already evidence of a significant increase in asthma at an earlier age.

    Children’s lungs are more susceptible to nanoparticles

    Nano-particle pollution is also an ecological problem that affects many life forms and disrupts the delicate system balance, including crop production.

    If reports of the consequences of climate change and the human contribution to climate change are anywhere near in the ballpark, this is also huge. In fact, it boggles the mind.

    The implications of energy, environmental, and ecological economics are wide and deep. What monetary economics shows us that is that solutions are affordable if they are available.

    Ed Rombach Reply:

    @Ed Rombach,

    “If reports of the consequences of climate change and the human contribution to climate change are anywhere near in the ballpark, this is also huge. In fact, it boggles the mind.”

    It is hard to ignore that climate change is underway. I live in Massachusetts and winters clearly aren’t what they used to be, although only two years we had a killer winter which was very cold with a lot of heavy snow fall. The key question in my mind is what is causing the climate change? Human activity, solar activity, volcanic activity or some combination of the three. Clearly human activity must be a factor, but whether it is the dominant factor is impossible to measure as far as I can tell. As a former student of geology, I can tell you that climate change has been a constant force on this planet since long before humans ever walked the earth.

    To play devil’s advocate for a moment, the increase in carbon emissions should be a windfall for photosynthetic plants that consume carbon in the atmosphere and expel oxygen. In this way, some of the added heat in the atmosphere becomes stored in the green plants, kind of like the way that refrigerators work.

  5. perpetual neophyte Says:

    Warren – I’ve been reading your calls for WTI to converge up to Brent over the past year or so with a lot of interest. I’ve also read a pretty compelling case for a drop in WTI for 2013 assuming continued sluggish world growth and non-OPEC oil supply growth trending faster than infrastructure to move it efficiently. The latter is based on a research group that specializes in covering the energy infrastructure group.

    EIA projects WTI to average $90 in 2013 and I’ve seen a non-consensus forecast that looks for it to drop much lower than that ($65). EIA is also calling for Brent to drop from $112 to $105. They are calling for a reduced spread, but not convergence between now and 2014.

    Reply

    WARREN MOSLER Reply:

    ok, but saudis are necessarily price setter, not price taker, as long as the residual demand for their crude is maybe over 5 million bpd

    Reply

    perpetual neophyte Reply:

    @WARREN MOSLER,

    That, I haven’t fully integrated or digested in my thinking and understanding. I get it and don’t disagree. I’m just still connecting the dots between supply growth, demand growth and Saudi price-setting.

    I’ll try to email you one of the research reports I’m talking about. In early 2012 or late 2011, the EIA projected US crude excluding NGLs to grow to 6.7 MMBpd by 2020 (+20%). This research group was predicting growth of of +20% by the end of 2012 – and they look to be on track pending final numbers.

    It’s combining the big supply growth in the US, but dropping rig count and lack of infrastructure with potentially declining spare capacity in OPEC and Saudi as price setter that I’m still struggling with.

    Reply

  6. Ed Says:

    Well, the march contract just hit 96.50 this afternoon. so that’s about 1/3 the way to $110 in just a couple weeks. Guess the market is agreeing that seaway is just going to suck the supply from cushing and ship to international market.

    so far, good call warren.

    Reply

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