Bakken spot crude prices have traded at a premium to West Texas Intermediate spot crude prices since September 4. Bakken spot crude has not consistently traded at a premium to WTI since October of 2011 and has spent much of the last year trading at a discount of $10 or more. Over the last two weeks Bakken spot crude prices have traded at an average premium of $5 per barrel over WTI. The factors that have created the premium pricing are likely to stay in place into 2013. The Bakken premium versus WTI is dependent on the huge discount of WTI versus Brent spot crude prices, which is currently running at $18.50 per barrel. Brent prices represent the price of oil that can be shipped to ports around the world. What has hurt WTI pricing is that up until recently oil shipped to the storage hub for WTI at Cushing Oklahoma has been land locked. In May of 2012 Enbridge (EEP) reversed the flow of the Seaway pipeline to take oil form Oklahoma to the Gulf Coast rather than from the Gulf Coast to Oklahoma. The pipeline is currently carrying 150,000 barrels of oil, but once a pumping station is completed at Cushing in early 2013, the pipeline will expand to 400,000 barrels of oil per day. Once the line is expanded to 400,000 barrels a day, enough land locked oil will move away from Cushing narrowing the large discount with Brent. At this point, the Bakken premium to WTI would be expected to end.
Two factors have led to shifting the spread between Bakken oil and WTI from a discount to a premium. The most important is new rail take away capacity to the East and West Coasts now has more shipping capacity for oil than oil production in the Bakken. On September 4, Tesero received its first shipment of Bakken crude at a new offloading terminal that will allow the company's Anacortes refinery in Washington state to receive as much as 50,000 barrels a day by rail. Tesero believes the quality of Bakken crude is superior to the crude oil it was buying on the West Coast. Additionally, Irving Oil Ltd. expects a train terminal for offloading 70,000 barrels a day of Bakken and Western Canada grades near its Saint John refinery in New Brunswick, Quebec to be fully operational this month. Both of these refineries are paying oil prices based off the ability of the oil to be shipped globally at prices comparable to Brent spot crude prices. It is more expensive to ship oil via rail versus via a pipeline. But the new rail options to the coasts give oil companies the option to pay the extra freight costs to receive the premium prices for global oil. Since there is currently excess take away capacity in the Bakken the pipelines now have to compete with the rails for oil and have to pay the going rate.
The second factor is oil production growth in the Bakken has begun to slow more than expected. The North Dakota Industrial Commission announced that the rig count has dropped to 194 rigs, which is the lowest level since July of 2011 and below the all-time high of 214 reached in May. They also announced that daily oil production for the state in July averaged 674,000 barrels of oil per day. This was less than expected and only marginally higher than June. Bakken oil companies are concerned about well costs which are close to double what they were in 2009. Western North Dakota is a long way from larger population centers and the infrastructure in place has not been adequate to keep up with the boom in the Bakken. For example, there is a severe shortage of housing and if someone can find an apartment it is renting for $2,500 or more. Hence, the salaries to attract oil field workers are significantly higher than they are in other parts of the country. Many producers like Continental Resources (CLR) and Marathon Oil (MRO) are now focusing on reducing costs and not just on as rapid as possible growth. This trend should stay in place for the rest of the year allowing excess take away capacity to remain in place.
The companies that should get the most overall benefit for shareholders are the mid-cap and small-cap companies with a heavy concentration of exposure to Bakken oil. For example, Exxon (XOM) is a large Bakken producer, but the Bakken is just a small fraction of Exxon's revenues. The higher pricing of Bakken oil will give all of these companies a good chance to beat current analyst revenue estimates. Mid-sized companies like Oasis Oil and Gas (OAS), Northern Oil and Gas (NOG), Whiting Petroleum (WLL), and Kodiak Oil and Gas (KOG) have most of their production from the Bakken. Smaller companies poised to benefit from heavy exposure to the Bakken are Triangle Petroleum (TPLM) and U.S. Energy (USEG).
Disclosure: I am long USEG.