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Brent crude oil, despite today's blip, is moving inexorably toward $120/bbl, the point where...

Brent crude oil, despite today's blip, is moving inexorably toward $120/bbl, the point where fears of demand destruction bubble to the surface, according to Saxo Bank analyst Ole Hansen. Keith Schaefer, editor of Oil & Gas Investments Bulletin, explains why he thinks the price gap between Brent and WTI will widen further this year as U.S. crude prices tank.
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Comments (11)
  • wigit5
    , contributor
    Comments (4233) | Send Message
     
    Guess I should just bite teh bullet and buy more $PSX if the gap is going to widen further!
    11 Feb 2013, 10:17 AM Reply Like
  • investguru
    , contributor
    Comments (25) | Send Message
     
    This is funny. Why do demand destruction fears "bubble to the surface" at $120? Do you think motorists around the world are glued to their screens watching Brent futures prices, just waiting to cut back on their fuel usage as soon as we hit $120?

     

    The fact that US gasoline prices are now higher than when an all-time-high was reached for Brent or WTI ($147/bl in 2008), and that automotive and alternative technologies have had 5 more years to catch up since, means that demand destruction is already ongoing rapidly. I look forward to down-revisions of forecasts calling for a slight increase in US oil usage in 2013; we will instead see faster demand destruction than the ~250kbl/day we saw in each of the last two years.
    11 Feb 2013, 11:33 AM Reply Like
  • sbreslin2000
    , contributor
    Comment (1) | Send Message
     
    People are getting use to 4 dollar gas, it's the new norm, even though I hate that term "the new norm"
    11 Feb 2013, 02:00 PM Reply Like
  • Glenn Doty
    , contributor
    Comments (1116) | Send Message
     
    No.

     

    There are actually fundamentals that are factored into the market price. The Saudis are cutting their export because they see that as soon as a few pipelines are completed - allowing for oil to be piped out of or diverted away from Cushing - we'll finally correct the trade gap between WTI and the rest of the world's benchmarks.

     

    The first of those pipelines should be completed this quarter. That's introducing hundreds of thousands of bbl/day into the market in which Brent competes (Eastern US), while simultaneously reducing hundreds of thousands of bbl/day from the WTI market.

     

    Anyone predicting that the price spread between WTI and Brent will do anything other than dramatically reduce is a complete fool (unless the assumption is that the pipelines will suddenly fall many months behind schedule, in which case I'd like to see some form of evidence for such an assertion).
    11 Feb 2013, 02:08 PM Reply Like
  • Alex_G
    , contributor
    Comments (1124) | Send Message
     
    "Anyone predicting that the price spread between WTI and Brent will do anything other than dramatically reduce is a complete fool (unless the assumption is that the pipelines will suddenly fall many months behind schedule, in which case I'd like to see some form of evidence for such an assertion)."

     

    Glenn, it's a little more complicated than that. The new pipelines to the Gulf from Cushing won't really help WTI. The Gulf refinery complex will effectively stop importing light sweet this summer.
    The new capacity out of Cushing is to get WCS dilbit down to the gulf, as they are configured for Maya crude, which has the same api as the WCS dilbit. The light sweet that they need will be supplied by off shore US supply, the Eagle Ford, and Permian, all of which have direct access to the gulf.
    WTI needs to get to the east and west coasts for the differential to narrow substantially, and right now it's getting there by rail, which can cost up to $15 a barrel. It might take 2-4 years to get all of that sorted out, which means the price spread is here to stay for a while.
    11 Feb 2013, 04:34 PM Reply Like
  • Glenn Doty
    , contributor
    Comments (1116) | Send Message
     
    Alex,

     

    I recognize the pipeline to the Gulf isn't a panacea, but simply allowing more crude to exit Cushing will allow WTI to build against other benchmarks, and will result in greater supply into the markets that are supplied by other benchmarks. Once the crude is in the gulf, it can be shipped to Jacksonville, Charleston, Savanna, Norfolk, Baltimore, Philidelphia, NY/NJ, Boston, and many other ports along the East Coast for less than ~$5/bbl.

     

    Yes more pipelines east through the Appalachians would make a bigger difference, but any effort to increase flow out of Cushing will result in more supply elsewhere, and less excess in Cushing itself. That just is.
    ;)
    11 Feb 2013, 05:29 PM Reply Like
  • Alex_G
    , contributor
    Comments (1124) | Send Message
     
    Glenn, it's not the logjam at Cushing, it's the logjam at the Gulf. Seaway has a capacity of 400mbpd, but is only delivering 175mbpd. It will take at least 2 years to reconfigure logistics there to be able to put oil on ships.

     

    Then you have the Jones Act. It will take at least 2 years to get enough US flagged shipping in place to make a difference.

     

    I think that the net effect of all of the new pipeline capacity is that it will create a fairly large differential between Brent and LLS. Remember, oil can't be imported out of the US unless it's to a Free Trade Agreement country. I've heard talk about allowing the swap of oil (WTI for Maya), but it probably has only a slim chance of happening.
    11 Feb 2013, 07:52 PM Reply Like
  • Glenn Doty
    , contributor
    Comments (1116) | Send Message
     
    Alex,

     

    We don't need to export oil out of the country, we need to export oil from the Gulf to New York, New Jersey, Pennsylvania, Virginia, etc... Something we will be able to do more of once we get greater volumes of oil from Cushing to the Gulf.

     

    We're still ~7 Mbbl/d away from needing to worry about exporting to other countries.
    12 Feb 2013, 08:57 AM Reply Like
  • redbaron
    , contributor
    Comments (899) | Send Message
     
    Glen, my take is that you are arguing with people who actually know and understand the situation.........and the spread just keeps getting wider. It looks to me like the different crude oil grades makes reconfiguring specific refineries difficult, and some times impossible without excessive investment. All crude is not the same, and all refineries are not created equal. GS just upped their forecast for the spread to go to $30. I am trying to listen to all opinions and understand this spread situation, and while I can claim no particular expertise, this is not the first time such a situation has happened. While this spread exists and gets wider, it looks to me like the domestic refiners, and specifically, the mid-continent refiners, have a big advantage. JMHO
    12 Feb 2013, 05:20 PM Reply Like
  • Alex_G
    , contributor
    Comments (1124) | Send Message
     
    Bingo Red. Logistics aren't keeping up with production, hence the differential. I think GS is wrong, as they usually are on anything strategic (think trading house), but I do think that infrastructure won't be optimized enough to bring the differential to 0 for the next 2 years.
    12 Feb 2013, 11:20 PM Reply Like
  • Glenn Doty
    , contributor
    Comments (1116) | Send Message
     
    Redbaron, Alex;

     

    I will acknowledge that I was assuming it would be relatively easy to switch crude grades for the refineries. I guess that is because I've been involved in designing modern refineries for the past 5 years... and for our refineries we can switch oil compositions in real time and the separation system and fuel upgrading systems literally adjust in seconds.

     

    Sometimes you can forget how far control technology has come in the past few decades... but I cannot even imagine how or why it would take significant time to switch crude grades... I'll have to look that up and see what the hangup might be.

     

    It just doesn't compute that switching from Brent to LLS or WTI or Mars blend would really take more than a few (<10) days even for the most obsolete refineries.
    13 Feb 2013, 09:34 AM Reply Like
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