CALGARY — The hefty profit margins that some U.S. refiners have been enjoying due to a huge glut of oil at Cushing, Okla., may soon be over thanks to efforts by two major Canadian pipeline companies, an economist said Thursday.
Judith Dwarkin, director of energy research for ITG Investment Research, said the profit margins of Midwest refiners will weaken if Enbridge Inc. (TSX:ENB) and TransCanada Corp. (TSX:TRP) can move big volumes of oil from the Cushing storage hub south to the U.S. Gulf Coast.
“Those refiners that have been enjoying the heavily discounted crude prices will see their margins erode, all else being equal, over time, and potentially early in the next year,” she said.
The current oversupply at Cushing — a result of growing production from Alberta’s oilsands and the Bakken region of Saskatchewan, North Dakota and Montana — means refiners in the U.S. Midwest can buy their raw product for less than crude imported from abroad, and then sell the gasoline and diesel they produce at much higher world prices.
That has led to higher crackspreads — industry speak for the margins refiners make by turning crude oil into higher-value products like diesel and gasoline.
“They’ve been having some cracking good quarters — no pun intended — but it will be less of a bonanza as these crude prices re-equilibriate as the regional bottleneck is ameliorated,” said Dwarkin.
Once surplus crude is drained from Cushing and North American crude prices rise, costs will go up for those refiners, but the price they get for their products won’t necessarily.
Refineries elsewhere on the continent that refine sea-borne crude from overseas have not been having as good a time as those in the Midwest, said Katherine Spector, commodities specialist with CIBC in New York.
In fact, most U.S. refiners, especially those on the Eastern Seaboard or Gulf Coast, use more expensive internationally-priced crudes like Brent, rather than the cheaper U.S. West Texas Intermediate benchmark.
“Therefore our product prices whether it’s gasoline or heating oil look like a Brent price, too,” said Spector.
That causes a lot of confusion for the average fuel consumer.
“People see a WTI price on the news and they say, ’Well that’s not so high. What’s going on?”
WTI, the key U.S. benchmark, and Brent, an important international benchmark, have historically traded in tandem. But the Cushing glut has led to a sizable disconnect in recent quarters.
The gap between WTI and Brent was under US$9 on Thursday — down significantly from more than US$25 just two weeks ago, though some are skeptical the spread will remain that narrow for long.
In addition to the Cushing situation, upheaval in several oil-producing Middle Eastern countries this year was also a factor in the Brent-WTI gap, said Bob Tebbutt, vice-president of Peregrine Financial Group Canada.
Europe, for example, buys much of its crude from Libya, where fighting virtually shut down the country’s oil and gas industry for much of the year. The supply concerns that resulted pushed Brent prices higher.
“A lot of oil companies in the U.S. would have loved to have been able to load their crude oil onto tankers and send them over to Europe to take advantage of the higher price, but they couldn’t,” he said.
“Along comes the Canadian pipelines to the rescue, saying, ’Our problem is not the U.S. oil market, which is the largest in the world. Our problem is that we’ve got no place to send it.”’
Enbridge Inc. announced Wednesday it would buy a half-stake in the northbound Gulf-to-Cushing Seaway pipeline from ConocoPhillips for US$1.15 billion. The Calgary-based crude shipper and its partner Enterprise Products Partners LP intend to reverse the flow, bringing Cushing volumes south.
Enbridge rival TransCanada, meanwhile, said it may be able to get started on the southern leg of its contentious Keystone XL pipeline as early as the new year, provided the State Department signs off on it.
The 2,700-kilometre Alberta-to-Texas line has pitted environmental groups and local landowners along the pipeline’s route against energy producers and various interests that want to wean the United States off oil from the Middle East and countries such as Venezuela.
On Monday, TransCanada agreed to change the route of the Keystone XL pipeline to avoid the ecologically sensitive Sandhills region of Nebraska. That followed a delay imposed by the U.S. State Department that’s widely seen as a way for President Barack Obama to avoid making a decision until after the 2012 election.
If those proposals do go forward, the winners will be producers in Alberta’s oilsands and in the Bakken, who will be able to get better prices for the enormous amount of crude they are expected to churn out in the years ahead.