Trader Talk

Is Oil Refining Finally Getting More Efficient?

A number of refiners are weak today. In the long run, it may be good news for consumers.

Crude oil transporter Enbridge announced it was going to buy Conoco's 50 percent stake in a pipeline that ran from Freeport, Texas, to Cushing, Okla., for $1.15 billion and reverse the flow of oil. About 150,000 barrels a day will go from Cushing to the Gulf Coast by the middle of next year, and 400,000 by the first quarter of 2013.

Why is this important? Because refiners have been able to play a neat trick, profiting from the nearly $20 price difference between West Texas Intermediate (WTI) and Brent crude. Gasoline prices do not trade off WTI, they trade off Brent crude. Some refiners can buy oil at $99 a barrel, but sell gasoline based off the Brent crude price. Those margins will now be under pressure.

Part of the reason has to do with the bottleneck in Cushing: Oil is piling up there, and it's cheaper than on the coast, but there's been no way to get it to the coast. Until now.

If you don't follow oil politics, there's two large hubs in which oil is traded and stored in the U.S.: Cushing and St. James, La.

Right now, the pipelines go from the Gulf Coast to Cushing, but not the other way around.

Why just one way? Because U.S. inland oil production has been in decline for 30 years. We import oil, refine it on the coast, and then ship it inland.

Until today. Enbridge is reversing one of the pipelines, known as Seaway, sending oil from Cushing to the Gulf Coast. After buying out Conoco's share, Enbridge will co-own the pipeline with Enterprise Products Partners.

Making more WTI available for refining is, understandly, driving up the price of WTI and compressing the WTI-Brent spread.

Ultimately, this is good news. Hopefully, it will make for a more efficient refining market. Let's hope this results in lower gasoline prices. I'll believe that when I see it.

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