The Seaway pipeline, which was built in 1995 to transport crude from Freeport, Texas to Cushing, Oklahoma, is now reversed to transport the rising stocks in the latter to the main US refining centre on the Gulf Coast. The reversal may have an impact on crude oil pricing and the direction of international flows.

Before that, let me say that for the evolution of crude oil prices, one has to look at benchmark crudes in the main trading centres. There are many benchmarks but the most famous are West Texas Intermediate (WTI), the famous marker of North America, and Brent, the famous North Sea blend, which has gradually become the international marker by the fact that almost two thirds of traded oils are priced relative to it.

WTI and Brent qualities are close to each other and WTI is a bit lighter with less sulphur and location wise and is closer to the world’s biggest crude oil market. Therefore, historically the price differential between the two was generally around $1 (Dh3.67) to $2 a barrel in favour of WTI. However, sometime in 2007, the premium shifted gradually in favour of Brent over WTI and in early 2009, WTI traded at $10 a barrel discount to Brent and Saudi Arabia stopped using WTI in pricing its crude to the US. The broken relationship worsened and the differential between WTI and Brent reached almost $28 a barrel and WTI was described as a “broken benchmark” and “irrelevant”.

The settling point for the WTI price is in Cushing, Oklahoma and the continued rise in stocks of crude to the level of over 46.8 million barrels recently have made the continuation of this situation possible. It is easy to collect crude in Cushing by a number of pipelines but the lack of sufficient transportation capacity out of Cushing to other refining centres or export has been very detrimental to the price of WTI, though welcomed by refiners in the Midwest and the West who reaped the benefit of cheaper crude.

Pipeline capacity

The Seaway pipeline is 30 inch in diameter and 1077 kilometres long and in reversed service, the line is operating with an initial capacity of 150 thousand barrels a day (kbd) since the last couple of weeks. Further additions of pumps and modifications are likely to step up the rate to 400 kbd by early 2013. Encouraged by commitments of users, the owners are going ahead with raising the capacity to 850 kbd by the middle of 2014 by laying a complete parallel line. Gulf Coast refiners will benefit from the cheaper WTI but the theory goes that as the stocks in Cushing are reduced substantially, WTI price will increase and its parity with Brent may even be restored.

Analysts are divided over the impact of the reversal. Goldman Sachs believe that relieving stocks at Cushing should ease the pricing anomaly where inland US crude trades at an abnormally wide discount to seaborne Brent and that the WTI discount to Brent may narrow to $5 a barrel by the end of the year. But Barclays believe the reversal is almost irrelevant as the bottleneck will persist at Cushing for some more time to come as the rapid growth of oil production in the US and Canada outstrips pipeline, railway and barge projects to carry it south. Barclays recently raised their Brent price forecast and lowered WTI such that the average spread for 2012 would be $15 a barrel, $10 in 2013 and no return to parity until 2020.

Knee-jerk reaction

Even at the announcement that Seaway will be reversed, the market reacted by reducing the gap between the two crudes to $9.21 a barrel but this was thought to be a knee-jerk reaction and the differential widened again. The current differential is about $15 a barrel and is gradually reduced for future months.

But let there be no doubt that completion and expansion of other pipelines and rail and barge transportation facilities from Cushing to the Gulf coast, which may eventually raise the flow to 1.5 million barrels a day, will indeed ameliorate the WTI-Brent spread and we are unlikely to see a $27 a barrel spread again.

But rising Canadian heavy and US shale crude production in addition to the rising southbound transportation capacity to the Gulf coast will reduce the need for imported supplies and the talk about energy independence and reduced dependence on the Middle East is on again. The Nigerians are already worried about their exports to the US Gulf and are seeking buyers in Europe and Canada especially after the closure of some East coast refineries.

Oil producers should be watchful for these changes as they are likely to affect the crude oil market worldwide and not just in the US.

— The writer is former head of the Energy Studies Department in Opec Secretariat in Vienna.