By the end of this week (Friday January 11, 2013) Phase 2 of the Seaway Reversal pipeline project that delivers crude from Cushing to Houston is supposed to have come online - expanding pipeline capacity from 150 Mb/d to 400 Mb/d. Phase 1 of the project was eagerly anticipated by the market but since then (June 2012) the narrowing in price differentials between WTI Cushing and Brent expected by much of the market has not materialized. Today we explain why Seaway Phase 2 is only one factor in today’s complex US crude market evolution.
The Seaway pipeline runs from Cushing, OK to Freeport, TX (passing through Houston on the way) and originally moved crude from the Gulf Coast up to Cushing. The joint owners of the pipeline, Enbridge and Enterprise reversed the pipeline last June to flow crude from Cushing to Freeport. Phase 1 of the project provided shipping capacity of 150 Mb/d. Phase 2 of the project expands the existing pipeline capacity by adding more pump capacity to increase the volume to 400 Mb/d. Phase 3 of the project is to build a parallel crude oil pipeline alongside the original that will more than double capacity to 850 Mb/d and come online in 2014. RBN Energy Blog contributor Industrial Information Resources explained the project engineering in a post last August (see Seaway Reversal Project).
The “Simple Theory” of WTI Price Recovery
Market speculation about Seaway Phase 2 centers on whether or not the addition of another 250 Mb/d of crude oil capacity between Cushing and Houston will cause the price of West Texas Intermediate (WTI) crude at Cushing, OK – the Midwest domestic market benchmark and the crude delivered against the NYMEX futures contract - to recover lost ground against the Brent ICE futures benchmark. As pretty much everyone involved in crude oil analysis knows by now, WTI has been trading at a discount to Brent over the past two years. That discount has been hovering around the $20/Bbl level for the past six months - even though the two crudes are of similar quality and WTI traded at a slight premium to Brent up until August 2010. It is generally accepted that the large WTI discount to Brent came about because of an oversupply of new crude production from Canada and US domestic shale plays such as the Bakken field in North Dakota into the Midwest market. The new production backed up supplies at the Cushing hub where WTI is traded, causing its price to fall relative to international crudes that are linked to Brent. Since that price dislocation occurred some have assumed that all it would take to end the WTI discount to Brent is for new pipeline infrastructure like Seaway to open up and let the Cushing crude glut flow out of the Midwest -where it is not needed - down to the Gulf Coast where there is plenty of refinery demand. At that point, theoretically WTI prices would resume parity with Brent, the clouds will part and the sun will shine on Oklahoma. For the sake of argument we are going to call that the “Simple Theory” of WTI price recovery.