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WTI – Brent Spread to test $30 Level in 2013

EconMatters's picture




 

By EconMatters

 

 

Seaway Pipeline or Garden Hose

 

This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013. 

 

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage. 

 

How bad would capacity constraints be without a booming export market?

 

So good thing there is an export market for US finished petroleum products or oil and gas prices would be much lower, as in the US, demand is so low relative to supply, that you almost cannot give the stuff away, and the refiners still cannot utilize all the oil that Cushing needs to send to alleviate their escalating storage issues which stand at 52 million barrels and climbing. 

 

60 Million Storage in Cushing to be tested in 2013

 

Expect Cushing oil inventories to pass the 60 million threshold, and let`s watch how price reacts to that level. My first reaction is that a whole bunch of spread tightening trades will have to be unwound throughout the oil curve. My second reaction is that the $30 premium for Brent over WTI is now on the table for 2013. 

 

What happens when Cushing is full?

 

What happens if Cushing reaches complete capacity levels in 2013, does the oil back up further along the supply chain? A nasty logistics nightmare is beginning to play out for producers, now where do you send the oil? 

 

At any rate, WTI Oil is probably going to be going much lower from here, and the 2013 average will be well below current market prices. 

 

175,000 versus 400,000

 

Now back to what Enterprise said regarding the oil backup, citing "unforeseen constraints" in reducing deliveries to 175,000 barrels a day from 400,000 barrels a day at its Jones Creek terminal in Freeport, Texas. Enterprise added that maximum storage levels at the terminal have been reached. 

 

Seller`s Market for Storage Building

 

This is just hilarious, and is something that we touched upon before that there is so much oil coming out of the ground currently and for the next decade that much more storage capacity is going to be required throughout the country. 

 

Basically, the refiners need to build more onsite storage facilities, the terminals need to build more onsite storage facilities, Cushing Oklahoma needs to increase its storage facilities, and the oil fields themselves are going to need to build onsite storage facilities, as the entire supply chain is backing up right now like a clogged plumbing pipe in your house.

 

Too bad for Consumers, supply levels don`t match the Market prices

 

This is just hilarious, especially given the supply disconnect with the price right now in WTI. But how could this have not been foreseen by the pipeline operators?

 

I get it domestic supply is more than your outdated models planned for, and refinery demand even with exports cannot use all the freakin oil, and now you are stuck with an underutilized asset that doesn`t work as good as rails at getting around storage constraint issues. 

 

I would love to be a fly on the wall for this conversation

 

How do you explain this one to upper management? Well boss……I know we just expanded……..well…um….we thought that……this has to be a sick joke right? Nobody could be this bad at modeling demand/ logistical constraints for their expensive expansion project! 

 

After five minutes of casual thinking I thought this was going to be a problem, was this even considered in the project analysis report? Did they really have to run it at full 400,000 for a week to discover this issue? 

 

Talk about keystone cops, the picture in my head of the “light bulb moment” when someone realized the supply constraint issue on the ground and had to report this up the chain of command is just priceless right now! 

 

 

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Tue, 02/12/2013 - 17:14 | 3237784 Market Analyst
Market Analyst's picture

A final note: You do know the oil market is rigged, and that the reason Brent is so popular is that it isn`t attached to actual storage reports, inventory data that can be openly tracked, so much easier to manipulate, and have a positive rollover effect each month with much less transparency than wti. The big players love those features.

Tue, 02/12/2013 - 16:54 | 3237732 Oxygen
Oxygen's picture

War with Iran to put Oil above 200$. US need inflation, not deflation.

Tue, 02/12/2013 - 15:43 | 3237530 joego1
joego1's picture

I have some empty 55 gal drums, send some my way.

Tue, 02/12/2013 - 14:54 | 3237333 CPL
CPL's picture

http://www.theatlanticcities.com/jobs-and-economy/2012/09/where-american...

There you go. 

Learn how oil industry works and who uses it before grasping at straws on production of shitty, lower than Bongo grade 'oil'. 400,000 barrels might supply somewhere like LA with power for about four hours in a country that imports 100's of billions of barrels a year.

So if you like engine flushes every 6 months, then by god, you've got an answer to the problem of being unable to spend another grand a year in mantenance on top of regular tune ups and oil changes.

Invest into this strategy at your peril.  All you are doing is funding someone else's energy issue, not yours.

This shit smacks of BreX type nonsense just liek the Canadian tar sands.  I would suggest anyone that wishes to lose their money to invest heavily.  Otherwise stay away.

Tue, 02/12/2013 - 15:44 | 3237533 Tortuga
Tortuga's picture

Bakken oil is considered sweet crude because of a specific gravity of about 40 and low sulphur content, which makes it "sweet" to refine into gasoline, diesel, kerosene etc.Same for the oil bonaza in South Texas. No bongo oil there.

http://dakotaoilprocessing.com/usrfiles/TrentonDieselRefineryFactSheet.pdf

AND, which country imports billions of barrells of oil? We are using 19 mbd which a long way from 100's of billions of barrells.

http://www.fool.com/investing/general/2013/01/29/oil-imports-dropping-li...

So, What's your point?

Tue, 02/12/2013 - 14:29 | 3237238 CrashisOptimistic
CrashisOptimistic's picture

This all is generally bad analysis.

The US imports a lot of oil.  Exporting refined product is not really all that important, because some of that was imported crude.  The numbers also get somewhat insane in that refined products have larger physical volume than the crude, and that gain in physical volume (not sales volume, physical volume) is counted as "US oil production".  

No other country in the world does this.  "Refinery gain", and that gain may have come from crude imported from Nigeria.

The overall point here is Brent is the price of oil.  WTI is not significant.  Oil arrives by tanker and we pay Brent prices for it, so if the country were "awash" in oil, we would not pay that price.  We do.  

If the price differential is big enough and there truly was enormous quantities waiting for a buyer, it would get to the buyer.  The price would arrange that to be so.

There are lies being told.  You have to track them down.

Tue, 02/12/2013 - 16:16 | 3237625 Tortuga
Tortuga's picture

"If the price differential is big enough and there truly was enormous quantities waiting for a buyer, it would get to the buyer.  The price would arrange that to be so."

Your premise is incorrect. The USA storage facilities are full, the refineries storage facilities are full. All the railroad tank cars are full. The pipelines are full. The Price of WTI is $97.49 bbl which equals $2.3 a gallon, and gasoline is too damn high considering 18.5 to 19 gallons per 42 gallon bbl of oil. Even with there being over 200 types of gasoline blends adding to the cost of gasoline; Economics 101, which I realize no longer valid because of govt's, bankster algorythms and dark pools; an over abundance of a "widget" causes prices to fall, unless there is a monopoly.

We are being "Speculated".

Tue, 02/12/2013 - 14:46 | 3237293 Market Analyst
Market Analyst's picture

And that is why the Gulf Coast refiners are all losing so much money right now, and all those East Coast refiners are expanding new capacity like crazy? [sarcasm]Don`t bother commenting on something you know absolutely nothing about, you just embarrass yourself going forward. Every time I see a comment by you, I will think too bad he probably reproduces. Do you really believe that crap, or are you just long?

Tue, 02/12/2013 - 14:32 | 3237264 Market Analyst
Market Analyst's picture

Keep telling yourself that, you don`t go for 15 years with high storage at Cushing being 30mm, and double that in a year. You my friend are a moron!

Tue, 02/12/2013 - 14:46 | 3237306 madcuban
madcuban's picture

Between now and the end of the year, other pipelines are coming online to drain west texas/permian of their current surpluses.  Those are bbls that will no longer have to go up to Cushing and instead will go to waterborne refineries.  By early 2014 the second leg of Keytstone XL will come online and open up bbls from Cushing directly to the GC.   So whether econmatters wants to agree or not, those are facts.  The comment on doubling capacity in one year is incorrect.  It took a year and a half of planning and a year and a half of building and at the end of last year, most the the tanks were completed.  The hayday of building tanks there is over. All this shifts bottlenecks from one place to another (away from Cushing and into the gulf coast). But even if you choose to ignore that portion of fact, its relation to Brent in this day and age is purely arbitrary.  He might be right for a very shrot while in the very near future, but don;t expect that to last through all the new pipes.

Tue, 02/12/2013 - 14:58 | 3237345 Market Analyst
Market Analyst's picture

You really are slow: Last year ~30mm Cushing Inventory, 2013 Cushing 52mm in storage.

I will avoid stating the facts about when the pipelines actually come online, try reading this article for a clue as to what happens when the supposed experts keep getting it wrong about Cushing Supplies, pipelines alleviating these supplies, and the Brent-WTI Spread.

I keep hearing the same old crap, and everybody keeps making excuses why they are wrong, just admit your talking your book and be done with it - otherwise, you continue to believe in something that is inconsistent with the actual data - ask yourself why?

http://www.econmatters.com/2013/02/goldman-sachs-jeff-currie-continues-t...

 

Tue, 02/12/2013 - 15:13 | 3237397 madcuban
madcuban's picture

You seem to avoid facts because they disagree with your opinion.  Good luck with that.

Tue, 02/12/2013 - 17:59 | 3237965 Just Ice
Just Ice's picture

Article is correct inasmuch as we are awash in light sweet crude.  Market back at recent highs is disconnected from supply situation.  Energy bulls aquiver for continuing rally in wtic are as off base as the energy bulls were few years back in driving nat gas to 18/mmbtu while new fracking supply overran the market.

Tue, 02/12/2013 - 14:51 | 3237324 madcuban
madcuban's picture

how does someone down arrow facts?!  geez.

Tue, 02/12/2013 - 14:20 | 3237214 madcuban
madcuban's picture

Sorry to say, you have glossed over an extreme amount of other information.  But instead of going through all that, let's start with your assumed rate at 170kbpd is off.   The rate for february forward until the bottlenecks are resolved is around 260-270/day.

Tue, 02/12/2013 - 14:07 | 3237168 marathonman
marathonman's picture

WTI to Brent price differentials are making refiners like MPC, HollyFrontier, and Tesoro double their stock price.  If the differential gets bigger, then expect that trend to continue.  Mid-continent refiners for the win.

Tue, 02/12/2013 - 13:55 | 3237125 PicassoInActions
PicassoInActions's picture

How much is the difference between 2.50 per gallon and 3.50 per gallon for a year to the US consumer?

 

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