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Short Term Demand Boosts Oil Market

Short Term Demand Boosts Oil Market

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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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WTI Prices Surge On Keystone Spill


Oil prices surged on Wednesday on news that the Keystone pipeline might not restart for several weeks. The outage at the damaged pipeline ended several years of contango for WTI, pushing the benchmark into a state of backwardation for the first time since 2014.

TransCanada made a lot of headlines in the past week. The Keystone pipeline ruptured and spilled more than 200,000 gallons of crude oil in South Dakota last week, just days before TransCanada was given a greenlight for the Keystone XL in the state of Nebraska. South Dakota regulators now say that they could revoke the permit for the Keystone pipeline if it is found that the company violated the terms of its license. The spill was the third for the Keystone pipeline in less than 10 years.

“If it was knowingly operating in a fashion not allowed under the permit or if construction was done in a fashion that was not acceptable, that should cause the closure of the pipe for at least a period of time until those challenges are rectified,” said Gary Hanson, a member of the South Dakota Public Utilities Commission, told Reuters.

TransCanada said on Wednesday that it could take weeks to clean up the spill and bring the pipeline back online – news that sent shockwaves through the oil market. WTI spot prices surged on the news, pushing the benchmark back up above $58 per barrel.

Related: Norway’s $35B Oil Stock Dump Could Hurt The Industry

TransCanada said that November deliveries through the pipeline would be cut by about 85 percent, a major outage for the nearly 600,000-bpd pipeline. Phillips 66, a major refiner that purchases crude from the pipeline, said that it is expecting an outage of about four weeks.

This will accelerate the inventory drawdowns in the U.S. as refiners lean more on storage. According to Reuters, the outage could cut shipments to the U.S. by about 7 million barrels through November, a figure that would obviously grow if the outage lasts longer than expected.

The news not only sent spot prices up, but it also pushed WTI futures into a state of backwardation, a situation in which near-term oil futures trade at a premium to longer-dated contracts. Backwardation tends to be a sign of a tighter oil market, which is why supply for immediate delivery trades at higher prices. WTI has not been in backwardation since 2014. A few months ago, Brent flipped into backwardation, helping to incite some bullishness in the oil market, but WTI remained in a narrow contango.

The opening up of backwardation could induce steeper drawdowns on inventories as it becomes costlier to store oil because the cargo will only fetch lower prices when sold off at a later date. As companies unload inventories, the drawdowns could provide a further boost to WTI. At the same time, WTI is still trading at a discount to Brent, which means that U.S. crude exports will continue at elevated levels, another reason why inventories could continue to post strong weekly declines.

Related: U.S. Oil Rig Count Rises Amid Record Breaking Production

Of course, what happens next largely depends on the outcome of the OPEC meeting next week. There is a danger of a sharp selloff in crude prices if OPEC fails to extend its production limits for 9 months through the end of 2018, a proposal that has been heavily hyped by OPEC officials for weeks. The large buildup in bullish bets by hedge funds and other money managers adds another element of danger, making the downside risk much greater than the upside.

But should inventory data from the U.S. demonstrate much larger-than-expected declines – owing in part to the Keystone outage – that would go a long way to putting a floor beneath WTI. “We’re going to need to see this kind of [reduced inventories] data every week to start another leg on this rally,” Gene McGillian, research manager at Tradition Energy, told the Wall Street Journal.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Joe on November 24 2017 said:
    I think you hit the nail on the head Nick. We all realize that the price of oil is overly dependant on what is happening in the USA but those are the rules we agreed to live by. It is an eyopener how Black Swan events such as pipeline outages or forest fires can effect the price of oil.

    Sorry but I have to bring up a pet peeve. Whoever is picking the photos for the articles is doing an injustice to accurate reporting such as photos of an above ground pipeline when talking about buried pipelines and in this case a photo of a marine spill when the South Dakota oil spill was in a farmers field. Not fair and an a example of fake news that President Trump talks about.
  • Dell Toki on November 26 2017 said:
    At the end of the day, it's an environmental disaster, 800,000 + litres spilled over natural land... by Trans Canada, a company who has had three previous incidents within a ten year period !!

    "TransCanada said on Wednesday that it could take weeks to clean up the spill and bring the pipeline back online"... No mention of the damage to the environment at all.

    It's like saying... the MAIL has to get through no matter what. It seems in this case, the OIL has to get through no matter what !! The land and environment don't seem that important when $$$$ are at stake.

    It is a shame when some are trying to promote clean and green to save what is left to save, and others are more concerned about the $$$$.

    It really makes one ponder... are there honestly people out there that don't give a rats..??

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