WTI’s upcoming ‘Keystone’ problem | FT Alphaville

WTI’s upcoming ‘Keystone’ problem

If you thought the distortions in the WTI-Brent spread couldn’t keep going for much longer, you may be interested in the following.

TransCanada’s extension of its Keystone pipeline could see it pumping as much as an additional 156,000 barrels per day into Cushing, Oklahoma, as of next month — putting further pressure on capacity at the Nymex WTI future delivery point.

Of course, this has long been expected.

JBC Energy wrote as much in December last year:

WTI weakness looks set to become a regular feature of 2011. In Feb 2011, Transcanada expects to inaugurate flows along a new spur off the Keystone pipeline, linking Steele City Nebraska with Cushing Oklahoma, the delivery point of the Nymex WTI crude contract. The extension will boost total capacity of the Keystone pipeline to 590,000 b/d and should result in more crude getting stored in and around Cushing.

While storage operators are increasing storage capacity, it is nonetheless likely that the additional crude flows will contribute to the frequent dislocations between WTI and the wider market that occur when storages around Cushing near total operable capacity.

And as they also noted, there is really only one way to fix this:

A lasting solution to this problem will only come in 2013 when a Trans-American pipeline is built linking Canada with PADD-3 via Cushing.

An extension is basically needed to release crude from Cushing and allow it flow to the Gulf, so it can be released onwards into other markets. Currently, all pipelines lead to Cushing and there are only a limited amount of refineries that can take up the flow — that is the problem.

Although, this was never really an issue until sizable Canadian flows began flowing into the system, competing directly with flows from the Gulf.

Back in December JBC Energy put up this chart to reflect the pipeline quagmire:

Given the above, it won’t be until the so-called ‘phase three’ of the Keystone project is approved that chronic WTI discounting might become a thing of the past.

Bloomberg, for example, reported this week that TransCanada believes it’s essential if higher prices for Canadian crude are to be achieved, since it is now obvious that existing markets for Canadian crude have become oversupplied.

How President Obama’s ‘Sputnik moment’ will impact that approval process, though, is yet to be seen. One thing is sure, environmental groups have been lobbying hard to have the application rejected on grounds of toxicity and leakage risk.

In the meantime, and until the extension is actually built, the market would do well to expect nothing other than ongoing distortions between WTI and other non-landlocked crudes.

And that includes US crudes like Light Louisiana Sweet and Mars too, not just Brent.

Regarding the former, Sean Corrigan at Diapason Commodities points out that the spread between WTI and LLS has just hit a fresh record:

The next thing to watch is at what point the differential will become profitable enough to start transporting crude by truck.

Now that would be something.

Related links:

Correlation trading and the WTI-Brent spread
– FT Alphaville
US mulls ‘supplemental’ draft EIS for TransCanada’s Keystone XL: Clinton
– Platts
Brent’s got its problems too
– FT Alphaville
‘WTI about as useful as a chocolate oven-glove’
– FT Alphaville