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OTTAWA — The Cushing logjam has broken, and with its opening, North American oil has lost the bargain-basement status it has sustained for the past two years.
Since early 2011, oil producers in the United States and Canada have suffered from large discounts in the market – the trendsetting West Texas intermediate (WTI) was priced well below international benchmark North Sea Brent, while a larger-than-normal gap opened up between WTI and Canadian heavy crude.
The boom in U.S. tight oil production, on top of growing oil sands volumes from Alberta, created a glut at Cushing, Okla., a terminus that served as a traditional pricing-point for WTI but had virtually no pipeline access to the massive refinery capacity at the Gulf Coast. As a result, companies invested heavily in new transportation – pipelines, rail cars, barges, even trucks – to move landlocked North American crude to coastal markets where it would fetch international prices.
Now, that investment in transportation is providing a big payoff. Along with the stronger economic news in the United States, the increased ability to get western oil to markets on the U.S. Gulf Coast and East Coast is credited for driving North American crude higher, even as Brent prices lag.
With a big jump Thursday, WTI prices are now less than $1 below Brent – the smallest spread since late 2010. WTI rose $1.56 on the New York Mercantile Exchange Thursday to $108.04 (U.S.) barrel, its highest close in 16 months. Brent settled at $108.70, up 9 cents. Prices for Canadian heavy oil – Western Canada Select – have climbed even more quickly than WTI this year. Compared to a whopping $40 discount late last year, the WCS-to-WTI discount had narrowed to $16.50 a barrel Thursday, according to Net Energy Inc.
The increased amount of oil being shipped by rail was brought into sharp relief after the disaster at Lac-Mégantic, Que. A train carrying crude headed for Irving Oil Ltd.’s Saint John refinery derailed and exploded, killing an estimated 50 people. The industry will no doubt face increased safety requirements that will drive up costs.
In addition to an increase in rail capacity, pipeline companies have made progress in connecting landlocked production to markets. Enbridge and its U.S. partner – Enterprise Products Partners LP – opened the key Cushing bottleneck with the reversal and expansion of the Seaway pipeline, while TransCanada Corp. is currently building the southern leg of its planned Keystone XL line, which it says will be needed regardless of the U.S. decision on the controversial oil sands pipeline.
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