* Seaway pipeline reversal a milestone, not whole picture
* Barge-hauling, crude-by-rail traffic also surging
* Canadian imports, U.S. shale growth may overwhelm
By Bruce Nichols and David Sheppard
HOUSTON/NEW YORK, May 16 (Reuters) – Just ahead of the
Seaway oil pipeline restarting in reverse to clear a bottleneck
of crude in the U.S. Midwest, Wall Street analysts have rarely
been more divided over the outlook for one of the hottest oil
market bets in years triggered by the glut.
For some like Goldman Sachs, the reversal of Seaway’s flow
set for Thursday is a seminal moment, marking the first major
pipeline to ship oil directly from the Midwestern trading and
storage hub at Cushing, Oklahoma, to Houston in the country’s
main refining center on the Gulf Coast.
Goldman and others say relieving swollen crude inventories
at Cushing, the delivery point for the New York Mercantile
Exchange’s West Texas Intermediate futures contract,
should also ease the oil pricing anomaly that has roiled the
market for 18 months — inland U.S. crude trading at an
abnormally wide discount to seaborne Brent crude.
For others like Barclays, the reversal of Seaway by
Enterprise Products and Enbridge Inc is almost
irrelevant. They say the bottleneck will persist at Cushing deep
into next year as the rapid growth of oil production in the
United States and Canada outstrips pipeline, railway and barge
projects to carry it south.
Goldman analysts say the Seaway reversal will help narrow
WTI’s discount to Brent to $5 a barrel by the year’s end, even
before the line is expanded from 150,000 barrels per day to
400,000 bpd in early 2013.
The so-called transatlantic arbitrage
for June
futures, which has bounced between $27 and $7 over the past six
months, widened to over $18 a barrel on Tuesday; for December
futures, the spread was just over $13 a barrel. Over the
previous decade, WTI and Brent have averaged near parity.
Analysts at Barclays disagree. Last month they raised their
Brent price forecast and lowered WTI, creating an implied
average spread of $15 for 2012, among the widest forecasts. They
foresee a persistent WTI-Brent spread averaging $10 in 2013 and
not returning to parity until 2020.
“Our view is that Seaway’s reversal does not make much of a
difference to Midwest balances,” said Barclays analyst Amrita
Sen. “Domestic production growth and Canadian flows are likely
to dwarf (Seaway’s) 150,000 barrel per day takeaway capacity.”
VIEWS ASKEW
Nearly 18 months after the first appearance of the
unprecedented gap between WTI and Brent prices, the spread is
proving harder than ever to call. While pipelines like Seaway
grab the headlines, a host of harder-to-track railway projects
and barge shipments are clouding the view.
On average, expectations for the average Brent-WTI spread
for 2013 have widened in the last four months, rising from $5.30
in a Reuters December price poll to $7.20 in late April,
according to an analysis of the data.
But those numbers belie the persistent uncertainty. The gap
between the highest and lowest forecasts has remained near $20
since last August, well before a host of new projects were meant
to bring greater clarity over when the two prices would again
converge. The gap was wider twice, in October and November.
Recent adjustments have oscillated, moving the gap both
wider and narrower.
At the most bullish end of the spectrum, analysts at
Bernstein Research cut their 2013 forecast from $5 to parity,
citing extra transport including railways. Barclays went the
other direction, forecasting an average of $10 after predicting
for months that the gap would disappear next year.
Portugal’s Banco BPI has consistently held the most bearish
view of the spread at $20 a barrel in April’s poll.
A Reuters survey of more than a dozen analysts, consultants
and government data sources has suggested that the overall
surplus of Midwest crude is unlikely to fall significantly this
year — in fact, it may marginally rise.
“Anyone can take a guess at where the price spread is going
to go, but if you add up all the numbers, I don’t see Midwest
inventories draining this summer,” said Michael Hiley, head of
OTC Energy at NewEdge USA in New York.
“You’re starting to bail out the boat, but there’s still
water coming in,” he said.
TAKEAWAY LAGS NEW SUPPLY
Overall the rise in “takeaway” capacity to the Gulf Coast in
the south could total between 630,000 and 760,000 bpd by the end
of this year, according to experts surveyed by Reuters.
As northern output continues to boom, however, that may not
be enough. Between new shale production and rising imports from
Canada, 2012 growth in Midwest supplies were estimated to range
from 352,000 to 953,000 bpd, according to the informal Reuters
survey.
The huge difference between minimum and maximum forecasts of
Midwest output growth is largely due to uncertainties about the
speed of development in North Dakota’s Bakken region.
North Dakota’s oil production has shown few signs of slowing
despite soaring costs, with March output rising 19,000 bpd to a
new record 575,000 bpd.
Ultimately, even the hallmark pipeline projects are subject
to change. Industry intelligence provider Genscape told clients
last week that new construction suggested Seaway flows may
expand faster than expected. A second major expansion to boost
capacity to 850,000 bpd is due to be complete by mid-2014.
‘OFF-RADAR’ RAIL AND BARGE HOLD KEY
The long lead times, large budgets and public nature of
pipeline projects makes it relatively easy to track the dozen or
so new conduits that are expected to help ease congestion.
Not so for smaller-scale plans like those of GT OmniPort in
Port Arthur, Texas, a rail facility that will soon start
unloading as much as 80,000 bpd of crude, carried down from the
Bakken region of North Dakota and elsewhere.
“We’ve largely stayed off the radar,” said General Manager
Bart Owens. “We expect the first unit train of crude will arrive
in the second week of June,” he added.
Multiple variables can also make it hard to predict how such
projects will translate into flows.
For instance, railway capacity out of the Bakken fields is
set to expand by almost 500,000 bpd this year, authorities say,
with about a quarter of total shipments moving to coastal
markets where refiners can substitute for costly imports.
“By the end of this year, nameplate rail capacity could be
as high as 720,000 bpd, though we’d expect overall volumes to be
slightly lower,” said Justin Kringstad, analyst at the North
Dakota Pipeline Authority.
Shipments may still be constrained, however, as operators
run short of petroleum rail cars. Transport costs have trebled
since 2010, analysts at Eurasia Group said this week.
Total U.S. and Canadian railway shipment of crude and oil
products reached a record of more than 15,000 loadings in April,
50 percent higher than a year earlier, data from the American
Association of Railways showed — equivalent to about 1.3
million barrels a day, the oil production of Algeria.
“Rail car availability is an impediment, as is access to
loading and unloading facilities,” says Jim Siciliano, vice
president for business development at Nustar Energy.
NuStar has received railed crude at St. James, Louisiana,
since 2010. A recently completed expansion with EOG Resources
has bumped up capacity, and the complex is now unloading
140,000 bpd, according to Genscape.
The total volume of crude-by-rail receiving capacity in
Texas and Louisiana could exceed 400,000 bpd in the second half
of this year, up from about 90,000 bpd at the start of the year,
according to a Reuters totaling of old and new projects.
That growth has already outpaced many expectations.
Union Pacific hauled 20,400 carloads of crude oil in
the first quarter of this year alone, up from just 3,900 in the
whole of 2011, CEO John J. Koraleski said last month.
Warren Buffet’s BNSF also shipped 50 percent more
crude and petroleum products in the first third of 2012 versus
the year before, according to the company’s weekly reports.
Barge-hauling of crude down the Mississippi River also has
shot up. Government data show it has grown from a trickle in
2010 to a record 56,000 bpd in January. Further gains loom.
“Demand is just higher than we ever anticipated,” said Tim
Allen, liquid sales director for American Commercial Lines, the
second largest U.S. inland barge operator. They’re adding 14
newbuild 30,000-barrel tank barges to their fleet this year, and
may keep in service some that were scheduled to be retired.
And in the end, one Midwest choke point may clear only to
yield to another farther north as oil production and shipping
logistics race ahead.
“Seaway will start to drain Cushing, but there will still be
a big bottleneck at Chicago,” said Adam Bedard, managing
director at Bentek Energy. He sees no relief there until
mid-2014 or later.
(Reporting By Bruce Nichols and David Sheppard; Editing by
Marguerita Choy)
