Oil Prices jump as US Crude Takes Bigger Role on World Oil Stage
It may seem counterintuitive, but as more U.S. crude oil comes onto the market, it's helping to push domestic prices higher.
The industry has been innovating ways to move millions of barrels of shale oil from the center of the country to coastal refineries, and its efforts are paying off.
Government inventory data Wednesday showed the steepest two-week drop in crude inventories in 30 years. Commercial oil inventories fell 9.9 million barrels from the week earlier, on top of a 10 million-barrel decline last week. West Texas Intermediate crude futures for August delivery zipped higher as a result, settling up $2.99 at $106.52 a barrel, its highest close since March 2012.
Brent crude, the international benchmark, rose slightly, to just over $108.20 a barrel, bringing the spread with WTI to about $2—compared with $20 recently.
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Oil prices have been rising on geopolitical concerns, with production offline in Libya and unrest in Egypt creating concerns about the Suez Canal shipping lanes. But the decline in inventories gave it another boost.
"Going along with 'drill, drill, drill' is now 'ship, ship, ship,' " said John Kilduff, energy analyst with Again Capital. "The bottleneck has been addressed in Cushing [Okla]. We're seeing those inventories plunge. We're seeing it from all the rail movement. It's having an impact, as are the pipeline reversals."
Stockpiles of crude at Cushing fell by 2.69 million barrels last week, to 46.97 million barrels, the lowest level since December 2012. Cushing is a major oil hub and delivery point for oil futures options contracts based on WTI crude.
Gasoline stockpiles fell 2.63 million barrels for the week ending July 5, while some analysts had expected to see an increase.
"It was a very strong report this week. Demand for crude is high because of the high run rate of the refineries, and product demand is very strong as well, but that's typical for this time of year," Kilduff said. "We had a very strong gasoline demand week—9.1 million barrels per day. That's the first time in a while. It's usually under 8 million, and it's up 2.5 percent from this time last year."
Trains are carrying about 900,000 barrels of oil a day across North America, with rail taking North Dakota crude to the East and West coasts. According to IHS CERA, that number is up from 100,000 barrels of crude in 2010. The reversal of the Seaway pipeline has taken crude away from Cushing to the Gulf Coast, and the Magellan Longhorn pipeline is now carrying crude straight from the Permian basin in Texas to Houston for refining.
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The drawdown coincides with an increase in refinery runs, which at 16.1 million barrels a day for the week were at the highest level since July 2007. Distillate production of 5 million barrels was at an all-time high, and diesel demand, at 4.1 million barrels per day, was up 12.3 percent for the week.
"It's basically that the refiners are showing a demand for North American crude, and that's why it's approaching the global market price," said Gene McGillian, oil analyst with Tradition Energy. The U.S. is producing more oil itself and importing less, particularly from Algeria, Libya and Nigeria.
WTI is seeing a lot of new speculative longs, and a rough guess is that it could reach $110, he said. As for the spread to Brent, he thinks the prices will continue to move together.
"I think they're going to be parallel. They're both competing for the global market in one shape or another," McGillian said.
Andrew Lipow of Lipow Oil Associates said the oil price hike seems to be getting ahead of itself, though he expects to see prices of $3.60 a gallon nationally in the near future. The current average pump price is $3.50 a gallon for regular unleaded gasoline.
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"The fact is that world oil demand has been growing, and the U.S. has become an integral part of that supply chain," said Lipow. "My analogy is we just pulled the drain stopper. The sink has become unclogged. We're draining the sink, and its moving to the Gulf Coast, and some of it is being consumed by increased refinery runs and some of it is backing out imports that are seeking elsewhere in the world to go.
"It's my opinion that the market is well-supplied with oil today," he said. "Certainly, some of the run-up was due to Egypt, due to seasonal demand. We're in the peak world oil demand period. In the big picture, one reason the Brent-WTI spread comes out [is] because that inventory has made its way to the coast."
The U.S. produced 7.4 million barrels of oil a day, the highest since January 1992, while the increase in imports to 7.5 million barrels was relatively low, according to EIA.
"WTI is reconnecting with global oil supply. Cushing, Okla., is now reconnecting with the rest of the world," Lipow said.
In the third quarter, the Magellan Pipeline is supposed to be moving 225,000 barrels a day from the Permian Basin to Houston area, he said. The Sunoco Logistics Pipeline—which began delivering crude last week from the Permian to the Port Arthur, Texas, area—is carrying 90,000 barrels a day and expects to go to 150,000 by year-end, he said.
In addition, the BP Whiting refinery, shut for nine months, came onstream at the end of June, and the 260,000 barrel-a-day crude unit is processing mainly light sweet crude from Cushing and Canada, Lipow said.
Other efforts to move crude are in the works, including the southern leg of the TransCanada Keystone XL pipeline, now 80 percent complete and expected to have capacity for 730,000 barrels a day, he said. The southern section goes from Cushing to the Gulf Coast.
"These barrels are no longer landlocked, so they're tracking the global price rather than that landlocked lower price they were seeing for the last couple of years," Kilduff said. "They say high prices cure high prices. The market there was broken, and the industry set its mind to liberating those barrels, and unfortunately for us, they did too good a job."