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This Week In Petroleum: Seaway Pipeline Reversal

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THIS WEEK IN PETROLEUM REPORT RELEASE – November 30, 2011

This Week In Petroleum

The Seaway Pipeline Reversal and the WTI Price Discount: Location, Quality and Timing in Crude Oil

News earlier this month that a change of ownership would soon lead to the reversal of the Seaway crude oil pipeline between Texas and the U.S. Midwest sent ripples through U.S. and international crude markets, as participants anticipated an opening of new coastal markets for rising North American crude production that had long seemed landlocked. On the surface, the impact was dramatic. The price discount of West Texas Intermediate (WTI) at Cushing, Oklahoma, relative to other grades, having dramatically widened for months, had already started to narrow before the news broke; word of the impending reversal added momentum to that trend. The narrowing of the WTI discount was particularly striking with respect to waterborne grades of similar quality, such as UK Brent or Louisiana Light Sweet (LLS). The Brent-WTI spread fell from a near-record average of $23 per barrel (/bbl) in October to about $10/bbl on November 21, according to U.S. Energy Information Administration (EIA) calculations from Bloomberg, L.P. data. Over the same period, the LLS-WTI spread shrank from $25/bbl to $11/bbl (Figure 1). But the WTI discount to heavier, sour grades such as Mexican Maya or Ecuadorian Oriente, which prior to the 2011 bottlenecks traded at a deep discount to WTI and other light, sweet crudes, proved more resilient. The Maya-WTI spread fell by only $6/bbl, from $13/bbl in October to $7/bbl on November 21; the Oriente-WTI spread narrowed by $11/bbl. Maya's own discount to LLS and Brent has become exceptionally small, reflecting strength across the heavy, sour crude market. Despite the quality gap between the two grades, the LLS premium to Maya has fallen to $4/bbl, from an average of $13/bbl over the last two years.

 

 

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