Oils produced offshore in the Gulf of Mexico strengthened as traders bought physical crude to cover bets that the offshore oils would fall relative to Midwest grades after the expansion of the Seaway pipeline.
Enterprise Products Partners LP completed the 250,000-barrel-a-day expansion of the Seaway pipeline Jan. 11, allowing more domestic and Canadian crude to get a higher price on the Gulf Coast. The discount of West Texas Intermediate to Brent, the global oil benchmark, narrowed by 13 percent since the expansion.
“You are seeing some short-covering after you saw those crudes get a little bit hammered on the expectation of increasing supply heading for the region,” said David Bouckhout, senior commodity strategist with TD Securities in Calgary.
Heavy Louisiana Sweet’s premium increased $1.25 to $19.25 over WTI at 12:21 p.m. New York time, according to data compiled by Bloomberg. Light Louisiana Sweet strengthened by 50 cents to an $18.25 premium.
Other offshore Gulf oils also strengthened. Thunder Horse gained $1.40 to a $16.75 premium, while Southern Green Canyon moved $1.05 higher to a $14.30 premium. Mars Blend picked up $1.30 to trade at $14.30 a barrel over WTI, and Poseidon gained $1.10 to a $15.10 premium.
Demand may also increase as Motiva Enterprises LLC started at 325,000-barrel-a-day crude unit that will double the capacity of its Port Arthur, Texas, refinery.
“The thought is that with that refinery getting closer to its 600,000 barrel-a-day capacity, that is certainly going to help with regional demand,” Bouckhout said.
Offshore Gulf coast oils delivered in Louisiana will strengthen against Texas oils later this year, Goldman Sachs Group Inc. commodity analyst Stefan Wieler said in a research note today. A bottleneck is developing between new supplies coming into the Houston refining market on Seaway and other pipelines and the Louisiana refining market, he said.
“There is a bottleneck emerging that could prevent domestically produced crude arriving in Texas from reaching the refineries in Louisiana, leading to a dislocation of light sweet crude prices in Houston, TX, from those in St James, LA,” Wieler wrote in a note to clients.
The price of light, sweet crude in Houston could be discounted versus the offshore crude starting sometime late in the third quarter or fourth quarter, Wieler said.
West Texas Sour and West Texas Intermediate oil delivered at Midland both strengthened as several pipeline projects meant to carry away a glut of crude in the region move forward.
Each oil’s discount to domestic benchmark WTI delivered in Cushing, Oklahoma has narrowed by more than $10 a barrel since Jan. 10. WTS’s discount shrank $1 a barrel to $8 at 12:21 New York time, according to data compiled by Bloomberg. WTI in Midland gained $2 a barrel, narrowing its discount to $2.
Sunoco Logistics Partners LP and Magellan Midstream Partners LP are expanding pipeline capacity from the Permian Basin to Houston, and the 500-mile (805-kilometer) Seaway pipeline from Cushing, Oklahoma to Freeport, Texas has resumed service after completing the connections necessary to raise capacity from 150,000 barrels a day to 400,000 barrels.