WTI at Cushing vs. international crude oil prices: the background & the rest of the story
We present this brief review of pricing history to document the timing of the shift in pricing relationships between WTI crude oil and various other pricing benchmarks. Various information sources attribute these pricing divergences to completion of Keystone Phase II. Keystone Pipeline is a TransCanada crude oil pipeline project that originates at Hardisty in northern Alberta and will ultimately extend to Port Arthur, TX. Keystone will enable delivery of bitumen/diluent blend from Alberta's oil sands to refineries in the Gulf Coast. Keystone Phase II is the segment of the Keystone Project the extends the system from Steele City, NB to Cushing, OK.
Before September 2010, prices for WTI at Cushing, OK were at their typical premiums of $0.50-2.00 per barrel vs. dated Brent. From early September through the end of December, WTI prices were persistently discounted by $0.50-2.50 per barrel - a swing of $1.00-4.50 per barrel from typical price relationships. Although WTI/dated Brent pricing differentials diverged from their historically normal range during Q4 2010, pricing differentials between WTI and other domestic and international benchmarks remained within their historic ranges. However, the discount for WTI versus dated Brent widened to $5-7 per barrel during January 2011 and then jumped to $12-14 per barrel during February 2011. During this period, pricing relationships between WTI and nearly all other domestic and international benchmarks also diverged.
During Q4 2010, the relationship between WTI, dated Brent prices diverged well before crude oil began to flow through Keystone Phase II. To evaluate the veracity of conclusions that pricing differentials diverged entirely or primarily due to pumping crude oil into Keystone Phase II for line fill purposes, we have to evaluate trends in Canadian crude oil exports, crude oil inventory in Cushing and the Mid-Continent, refinery crude runs in the Mid-Continent and the overall crude oil supply/demand balance in the Mid-Continent.
First, Canada exports 1.8-2.0 million-bpd of crude oil into the U.S. each and every day. However, NEB statistics indicate most Canadian crude oil exports move into the Mid-Continent but 200-400 thousand-bpd of Canadian crude moves to refineries in the northeast and Pacific Northwest. According to EIA statistics from the Petroleum Supply Monthly Canadian crude oil shipments into the Mid-Continent averaged 1.23 million-bpd during Q4 2010 and were 28 thousand-bpd less than in Q4 2009.
EIA weekly statistics showed total imports into the Mid-Continent increased to 1.32 million-bpd in January and 1.34 million-bpd in February (based on three weeks of data for Feb). The cumulative increase in imports (based on weekly statistics) was 4.92 million barrels. However, EIA statistics for inventory at Cushing showed a net decline of 53 thousand barrels. Effectively, none of the increase in Canadian imports into PADD II increased crude oil inventory in storage at Cushing.
Finally, a review of Mid-Continent crude oil supply/demand balances also reveals interesting trends. First, refinery crude oil inputs averaged 3.3-3.4 million-bpd during December through February versus 3.15 million-bpd during October and November. Demand for crude oil was 185 thousand-bpd higher during the period when WTI prices diverged from global crude oil prices. Furthermore, after accounting for domestic production in the Mid-Continent at 735 thousand-bpd, the Mid-Continent crude oil supply shortfall averaged about 1.1 million-bpd. All of the Mid-Continent crude oil supply shortfall has to be imported into the Gulf Coast from international sources.
With prices for 1 million-bpd of international supply at a price premium of $11-14 per barrel, the flow of supply into the Mid-Continent from the Gulf Coast should decline during the next few months and crude oil inventory in the Mid-Continent should decline significantly.
Why would anyone sell crude oil worth $110 per barrel into a market where prices are $95 per barrel? More importantly, why would refinery crude oil buyers in the Mid-Continent pay $110 per barrel when they can buy up inventory in the Mid-Continent for $95 per barrel?
We routinely evaluate these and other topics of interest in NGL Markets in North America.
