Midwest Refiners May Enjoy ‘Cushing Upside’ Into 2013, RBC Says

The oversupply of crude oil in the Midwest has increased refining margins in the region, a benefit that could last into 2013, according to RBC Capital Markets.

“A glut of oil in the Midwest has lowered WTI crude oil prices relative to other light/sweet oils and caused refining margins in the region to spike, a significant positive for Midwest refiners,” Jacques Rousseau, an RBC equity analyst, said in a note to clients. “The problem should continue until new pipelines are built in 2013.”

Inventories at Cushing, Oklahoma, where the U.S. benchmark West Texas Intermediate contract is settled, rose in the week ended Jan. 28 to the highest level since at least 2004, according to the Energy Department. TransCanada Corp. started deliveries to the hub Feb. 8 in the second phase of its Keystone pipeline project.

“The consensus view in the market is that the oversupply of oil in the Midwest is going to get worse until pipelines are built to take oil to the Gulf,” Rousseau said. RBC estimates crude into the region should increase as much as 200,000 barrels a day this year.

The discount for WTI versus other light, sweet oils, such as Light Louisiana Sweet and Brent, is expected to drop this year to $7 to $10 as oil is moved by rail, truck and barge from the Midwest to Gulf Coast, Roussea said. In the interim, refiners processing Canadian crude “should continue to benefit substantially,” he said.

An expansion to the Gulf Coast, the third phase of TransCanada’s project, known as Keystone XL, may be operational by early 2013 if regulators approve. The XL extension will run from Cushing to Nederland, Texas, linking Gulf refineries to Canada’s oil sands.

This year, Midwest refiners may run at elevated rates to maximize production, while inventories in the region will probably decline slightly and the WTI discount will narrow, according to Rousseau.

“The problem could get even more severe in 2012, since Canadian oil-sands production volumes are scheduled to rise another 200,000 barrels a day, according to RBC estimates, and refiners are already operating at capacity,” Rousseau said.

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