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WTI discount drops on pipeline reversal EIA says differential to refiner acquisition cost down to $3 per barrel by end of 2012, based on announced Seaway pipeline reversal Kristen Nelson Petroleum News
West Texas Intermediate, or WTI, crude oil has been trading at a discount to refiner acquisition cost, or RAC, for most of 2011.
This is contrary to the traditional relationship, the U.S. Energy Information Administration said Dec. 6 in its Short-Term Energy Outlook, and is expected to change based in part on a change of ownership and announced reversal of the Seaway crude oil pipeline between Texas and the U.S. Midwest. Seaway is expected to begin shipping oil from Cushing, Okla., to the Gulf Coast next year.
EIA said the WTI price discount relative to RAC is expected to narrow from an average of $11 per barrel in the third quarter of this year to $3 per barrel by the fourth quarter of 2012.
The Nov. 30 online issue of EIA’s This Week in Petroleum said the price discount of WTI at Cushing, Okla., relative to other grades, has widened dramatically for months, and was beginning to narrow when news of the Seaway reversal broke, most dramatically falling from a spread of $23 a barrel in October between UK Brent and WTI, to $10 on Nov. 21.
EIA said location and logistic issues, “such as the challenge of bringing rising Canadian and North Dakotan production to market, the emergence of an oversupply of crude in the landlocked Midwestern market, and the lack of pipeline outlets to refining centers on the Gulf Coast,” have rightly been a focus.
The planned reversal of Seaway, initially with a capacity of 150,000 barrels per day in the second quarter of 2012 and ramping up to as much as 400,000 bpd a year later, is designed to address location and logistics issues, EIA said.
Global trend But the agency said another trend has emerged, with global consumption patterns shifting away from light products to middle-of-the-barrel products such as diesel and jet fuel.
While light sweet crude grades could historically fetch a premium to heavier grades because they yield more light products such as gasoline, recent strength in distillate prices has eroded the price premium of light sweet crudes compared with heavier grades, both sweet and sour, because they yield more products from the middle and bottom of the barrel.
EIA said the persistent discount of WTI relative to Maya “fits this broader pattern which extends far beyond the United States and North America.” While inland North American grades suffered the same logistical constraints as WTI, “crudes richer in middle distillates and heaver products, such as West Canadian Select, have fared comparatively better,” EIA said.
Timing is also important in crude differential timing. EIA said that “reversal of the Seaway pipeline, while it will better align supply and demand, may only briefly boost market efficiency,” because 2012 crude oil production is expected to increase in both Canada and the Lower 48, excluding the federal Gulf of Mexico, “with much of this increase coming from Alberta and North Dakota,” so new southbound pipeline capacity may be offset, over time, by incremental crude supply.
Crude supply EIA said crude oil production from Organization of the Petroleum Exporting Countries, OPEC, is expected to remain largely unchanged in 2011 and 2012, after having grown by 700,000 bpd in 2010. Libyan crude oil production began to recover in September and averaged 350,000 bpd in October, increasing to an estimated 550,000 bpd in November. EIA said it now expects Libyan crude oil production to average 900,000 bpd in the first quarter of 2012 and 1.2 million bpd by the fourth quarter, compared to pre-disruption output of 1.65 million bpd.
Non-OPEC liquids fuels production is projected to grow by 400,000 bpd this year and by 1.2 million bpd in 2012 to an average of 53.3 million bpd.
The United States is the largest source of expected growth, with increases of 340,000 bpd in 2011 and 240,000 bpd in 2012 expected “because of strong growth in on-shore tight oil production,” EIA said.
Production from Canada, China, Colombia and Kazakhstan is expected to increase at 100,000 bpd each on an average annual rate, with Russian and Mexican annual production expected to decrease by 170,000 bpd and 60,000 bpd, respectively, between 2011 and 2012.
Crude oil price up EIA said it has revised projected crude oil prices upward from its November outlook, particularly for WTI. The agency said it expects RAC to average $102 per barrel in 2012, slightly higher than its November projection of $100, but it expects WTI to average $98 per barrel next year, well above the $91 per barrel it forecast in November.
WTI crude oil spot prices averaged $97 per barrel in November, up from $86 per barrel in October; estimated average RAC was $104 per barrel in November, up from $98 per barrel in October, with EIA projecting the WTI discount to narrow to $3 per barrel below RAC by the fourth quarter of next year.
Natural gas The Henry Hub spot price for natural gas averaged $3.24 per million Btu in November, 32 cents lower than in October and 66 cents lower than the September average, with November marking the fifth consecutive month that Henry Hub prices have fallen.
EIA said it is lowering its 2011 forecast by 7 cents to $4.02 per million Btu and lowering the 2012 forecast by 43 cents to $3.70 per million Btu.
“Strength in domestic production and abundant storage supplies have led to relatively low prices this year and EIA expects supply growth to continue,” the agency said.
U.S. marketed natural gas production is expected to average 65.9 billion cubic feet per day this year, a 4.1 bcf per day increase from 2010, with all of the growth from higher onshore Lower 48 production, more than offsetting a year-over-year decline of 1.2 bcf per day in the federal Gulf of Mexico.
EIA said it expects total marketed production to grow in 2012, but at a slower pace, increasing by 1.8 bcf per day.
The agency said growing domestic natural gas production has reduced reliance on natural gas imports and contributed to exports.
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