To state the obvious, the last two years have been a mostly downhill rollercoaster ride for WTI relative to Brent and coastal US crudes, with 4Q12 a recent peak. The rollercoaster should head uphill for long stretches in 2013, as a procession of Inland Corridor draining pipelines either directly or indirectly alleviate the logjam in Cushing and PADD 2.
In total there should be over 20 large or medium-sized macro pipelines going into service in the US and Canada in 2013, with 5-6 of those addressing the Inland Corridor/Cushing logjam issue. Three important ones come in 1Q: the long-awaited Seaway ramp-up to 400kbd (incremental 250kbd), reversal of Magellan's Longhorn pipeline, which will initially bring 75-90kbd of Permian crude to Houston, then ramp to 225kbd by mid-year, and expansions to Sunoco Logistics' West Texas Gulf system that will enable about 80kbd of Permian crude to get to Houston and Nederland. In early 2Q we should also see the startup of Sunoco Logistics' Permian Express Phase 1, 90kbd initially ramping to 150kbd by mid-2013.
We believe the current round of 2013-15 pipelines should be more than enough to cure WTI at Cushing of its discount to coastal crudes for a half decade or so. More major pipelines will eventually need to be built to avoid another broad Mid-Con logjam by about 2017-18 though – the Canadian West Coast-East Coast projects are the most likely candidates, and we would anticipate that some other basins in the US could emerge with higher than expected production and require exit capacity to a coast. And of course rail will continue to alleviate pressure in the Inland Corridor.
Eoin Treacy's view
My view – The spread between Brent Crude and West
Texas Intermediate Crude has widened out for a number of reasons and helped
improve the USA's economic competitiveness in the process. There are a number
of reasons for this condition but perhaps some of the more important are that
supply from the North Sea Brent fields has peaked and been declining for the
last decade which has put upward pressure on pricing. Concurrently, the surge
in North American unconventional oil and gas supply and the lack of storage
and transport infrastructure has put downward pressure on WTI. The introduction
of better North American transportation infrastructure could change the dynamics
of the market.
The spread has lost momentum above $20 over the last two months and a sustained move below that level would suggest a medium-term contraction is underway.