New Pipelines Threaten U.S. Gulf Coast Oil Premium

By Dan Murtaugh and Naomi Christie

U.S. Gulf crude is set to drop below international prices, after trading at a premium for the longest stretch in a year, as new pipelines bring additional supplies to the region.

Enbridge Inc. (ENB), Enterprise Products Partners LP (EPD) and Plains All American Pipeline LP (PAA) plan to start bringing oil from Canada, North Dakota and West Texas by the end of the year. That’s likely to push Light Louisiana Sweet, the benchmark for low-density, low-sulfur oil on the Gulf Coast, below Dated Brent, according to Turner, Mason & Co. It’s been at a premium since Sept. 22.

The U.S. produced the most oil since 1986 last month as producers use horizontal drilling and hydraulic fracturing to extract crude from underground shale rock. As LLS falls below Brent, shipments to the Gulf Coast, where more than half the U.S. refining capacity is located, become less attractive. Imports from countries other than Canada sank to the lowest level in 23 years in June.

“We have growing production, infrastructure that’s about to come online,” said John Auers, vice president at Dallas-based energy consultant Turner, Mason. “We’ll get to where Dated Brent is trading at a premium to LLS, and we’ll get there sooner rather than later.”

LLS was 94 cents a barrel more than Dated Brent yesterday, the 10th straight day it’s been at a premium. That’s the longest stretch since August 2013. The premium dropped to 77 cents a barrel at 1:58 p.m.

Enbridge Pipeline

Enbridge in November will begin filling the Flanagan South pipeline, which will carry crude from the Chicago area to Cushing, Oklahoma, a company spokesman said last month. The line will carry crude brought to the Chicago area via Enbridge systems that extend into Alberta and North Dakota.

While oil stockpiles at the Cushing storage hub have fallen by 51 percent since January, inventories in the Midwest outside of Cushing are at 68 million barrels, the highest on record for this time of year, according to Energy Information Administration data.

Following the Flanagan linefill, Enbridge and Enterprise will fill the Seaway twin pipeline starting Dec. 1, according to a person familiar with pipeline operations. Linefill will take about seven days, the person said. That pipeline will more than double Seaway’s capacity to Houston from Cushing to 850,000 barrels a day.

“New supplies becoming available with the imminent completion of the Flanagan South/Seaway pipelines should help to erode (the LLS) premium over Brent-linked crude grades,” George Los, senior tanker market analyst at Greenwich, Connecticut-based shipbroker Charles R. Weber Co., said yesterday in an electronic message.

Sunrise Pipeline

Plains expects to complete its Sunrise pipeline in West Texas by the end of the year, company president Harry Pefanis said in August. The line will connect growing Permian Basin production stored in Midland, Texas, with the BridgeTex pipeline in Colorado City, which can transport the oil to the coast.

While the Gulf Coast will eventually have to reckon with a flood of new supplies, several factors may align to delay that until 2015, Andy Lipow, president of Lipow Oil Associates LLC in Houston, said in a phone interview yesterday.

Refineries in the Gulf are running at record rates for this time of year, helping to deplete inventories, and new rail terminals on the East and West Coast are expected to start operating before the end of the year, he said.

“Additional supplies of Mid-continent crude will make their ways to the East and West coasts as more crude-by-rail facilities come online in the fourth quarter,” Lipow said. That “helps alleviate a surplus from reaching the Gulf Coast.”

Production Impacts

Falling Gulf prices could have a ripple effect into inland oil fields, where prices are lower because of transportation costs and storage bottlenecks. Crude in the Permian, the largest U.S. basin, is $9.65 a barrel less than LLS. Bakken crude at a rail terminal in North Dakota was bid at $10.25 a barrel less than LLS this morning, according to Calgary-based brokerage firm Net Energy Inc.

“With new pipelines bringing more supply to the Gulf Coast, Brent prices sliding, refinery maintenance season coming, and US policy restricting oil exports, U.S. Gulf Coast prices could eventually fall to levels that will challenge the economics of developing marginal tight oil projects,” Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy, said by e-mail today.