Houston Light Crude Discounts Widening on Shipping Constraints

Light, sweet crude in Houston has weakened to a bigger discount to oil in Louisiana and to international benchmark Brent because of shipping constraints.

Crude has been trading in Houston for $4 a barrel less than Brent as new pipelines and increased Texas crude production have boosted supply in the city while takeaway capacity remains limited, according to Adam Longson, a commodity strategy research analyst for Morgan Stanley in New York.

Light Louisiana Sweet crude, the benchmark light, sweet oil on the U.S. Gulf Coast, increased 3 cents to a $1.36-a-barrel premium over Brent at 4:08 p.m. in New York. The crude is priced in St. James, Louisiana. Based on that spread and the the Morgan Stanley estimate, crude in Houston is about $5 to $6 under Louisiana.

Valero Energy Corp. Chief Executive Officer Bill Klesse said in a first-quarter earnings call April 30 that the discount for crude in Houston versus Louisiana was about $1 to $2 a barrel.

Magellan Midstream Partners LP started its Longhorn pipeline to Houston from West Texas in mid-April at 75,000 barrels a day, and plans to expand to 135,000 by late May. Sunoco Logistics Partners LP expects to begin shipping crude to Houston from West Texas on the Permian Express pipeline in June.

“Houston lacks a benchmark, but physical traders indicate Houston is already pricing about $4/bbl under Brent, given physical limitations in moving crude out of the area,” Longson said in his note. “Houston regional pricing will only erode further as more crude reaches the area.”

Incoming Supply

Enterprise Products Partners LP and Enbridge Inc. are bringing about 295,000 barrels a day to the Houston area from Cushing, Oklahoma on the Seaway pipeline. The nine geographic fields that make up the majority of Eagle Ford formation in South Texas yielded a record 471,258 barrels of crude a day in February, according to preliminary data released by the Texas Railroad Commission.

Royal Dutch Shell Plc reversed part of its Ho-Ho pipeline to carry crude from Houston to the Port Arthur area in January. The company plans to complete the reversal project to move crude to Louisiana refineries by the end of the year.

“Capacity to bring incremental crude to St. James is limited (pipeline, rail and barge), suggesting LLS will continue to trade well above Houston pricing, even after the Ho-Ho pipeline reversal later in 2013,” Longson said.

LLS’s premium to West Texas Intermediate crude in Cushing weakened 40 cents to $8.80 a barrel at 4:01 p.m., the smallest gap since January 2012, according to data compiled by Bloomberg. Heavy Louisiana Sweet sank 30 cents to $8.40 over WTI.

Mars Blend slipped 5 cents to a $4.45 premium over the U.S. benchmark, while Poseidon gained 10 cents to $4.35 over WTI.

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