A new era for US Gulf Coast oil refining dynamics has dawnedBy Bridget Hunsucker | January 15, 2013
After years of stockpiles and capacity constraints, a sea change in US crude flows began last week when the Seaway Pipeline expanded to 400,000 b/d. The pipeline marks the first capacity to link the oil hub of Cushing, Oklahoma, and the Texas Gulf Coast. This is expected to usher in a new period of crude enlightenment, a “renaissance” as some are calling it, albeit more pragmatic than artistic. (That is, unless one considers the hum of a drilling rig to be a beautiful ballad, pipeline blueprints an architectural achievement or the energy analyst a great philosopher.) Nearly a year ago, as a markets reporter trying to make sense of my new beat covering US Gulf Coast crude oil, my editors and managers used words like “unprecedented” and “shifting” to describe the exciting times to come in the US crude industry. “You will learn to love it,” one of my colleagues said. There are new developments that will change everything, industry folks said. They were right. In the next three months, awaited pipeline capacity will flow to the Gulf Coast region, relieving long-constrained crude production. One million b/d of pipeline capacity, most of it new, will connect Eagle Ford shippers with the Gulf Coast refining region. This is far more than what is currently being produced from the South Texas shale. But, in 2013, production levels are expected to rise beyond the Bakken Shale’s in North Dakota to 1.18 million b/d. In addition, Midstream Partner’s Longhorn reversal project, that will run from Crane to Houston, Texas, will soon bring as much as 225,000 b/d of capacity online from the Permian Basin. Upon flooding the Gulf Coast market with cheap, light sweet crude, the new pipeline capacity will cause pricing spreads to shrink — with Louisiana Light Sweet (LLS) narrowing to West Texas Intermediate (WTI), and WTI eventually gaining to Brent. The LLS-WTI spread is expected to narrow to just $5/b, the cost of the tariff rate, in the second half of the year. That compares with Platts assessment Monday of LLS at WTI plus $16.50/b, down already from last year when it reached above the plus $20/b-mark. While the WTI-LLS spread narrows, LLS is also expected to trade well below Brent, as the Gulf Coast light sweet benchmark comes more into parity with WTI. The WTI-Brent spread, which to date has been the typical indicator of Gulf Coast spot prices, narrowed sharply last week. On January 11, the day of the Seaway expansion’s completion, the ICE February Brent contract traded at a premium of $16.88/b over the NYMEX February light sweet crude contract, its lowest level since September 20, 2012. Adding more new supply to the Gulf Coast crude pool, Heavy Canadian crude such as Western Canada Select will also soon flow south on Seaway, sources have said. As refiners gain access for cost-advantaged crudes, current record-breaking Gulf Coast refinery operating rates are expected to reach higher. Tuner Mason analyst John Auers expects an increase of well over 1 million b/d of domestic light crude runs along the Gulf Coast, mostly displacing imported lights and mediums. “The early stages of the US crude supply renaissance benefited a minority of US refining capacity in the middle portion of the US,” Tudor Pickering analysts wrote in a note released Monday. “However, midstream bottleneck alleviation is quickly bringing this crude to the coasts, particularly the Gulf Coast, where 9 million b/d of capacity awaits.”
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