Oil in New York Surges Above $100

By Mark Shenk - Nov 17, 2011 3:32 AM GMT+0700

Oil climbed above $100 a barrel in New York to a five-month high as Enbridge Inc. said it will reverse the direction of the Seaway pipeline, adding an outlet for crude from the central U.S. and Canada.

Futures surged 3.2 percent after Enbridge agreed to acquire ConocoPhillips (COP)’s share of the pipeline that runs between Cushing, Oklahoma, and the Gulf Coast and announced the reversal. The change may alleviate a bottleneck at the Cushing storage hub that has lowered the price of benchmark West Texas Intermediate against other oils.

“In the short term, this will definitely clear some of the crude out of Oklahoma,” said Francisco Blanch, head of commodities research at Bank of America Corp. in New York. “This may not be enough to eliminate the glut in the Midwest because output is growing by hundreds of thousands of barrels a year. We still need additional transportation capacity.”

Crude for December delivery rose $3.22 to $102.59 a barrel on the New York Mercantile Exchange, the highest settlement since May 31. Futures are up 12 percent this year.

Brent oil for January settlement dropped 30 cents, or 0.3 percent, to $111.88 a barrel on the ICE Futures Europe exchange in London. The European contract’s premium to West Texas crude narrowed to $9.28 a barrel, the smallest spread since March 8. The differential surged to a record high of $27.88 on Oct. 14.

Keystone Pipeline

The announcement comes after the U.S. State Department said Nov. 10 that it will delay a decision on TransCanada Corp. (TRP)’s proposed Keystone XL oil pipeline to study an alternative route for the $7 billion project that avoids environmentally sensitive areas in Nebraska. The 1,661-mile (2,673-kilometer) link would deliver 700,000 barrels a day of Canadian oil to the Gulf.

“We will still need to see the Keystone pipeline built along with additional projects,” Blanch said. “The reversal of the Seaway is not enough.”

The Seaway pipeline will operate with an initial capacity of 150,000 barrels a day by the second quarter of 2012, the company said. Pump modifications expected to be completed by early 2013 will boost daily capacity to 400,000 barrels. Enbridge will jointly own the link with Enterprise Products Partners LP (EPD), the operator, the companies said today.

The reversal will enable more oil from Canada and North Dakota to reach the Gulf Coast, home to about half of U.S. refining capacity. Rail and barge projects that are planned, proposed or under construction may boost North Dakota’s oil- loading capacity by 450,000 barrels a day next year, Goldman Sachs Group Inc. said in an Oct. 4 report.

Rail and Barge

The reversal “will definitely reduce the amount of rail and barge that is needed,” said Hussein Allidina, the head of commodity research at Morgan Stanley in New York. “You are still going to evacuate some crude via some of these higher-cost transportation means” as Canadian and U.S. output rises.

Oil in New York has surged 36 percent since touching $74.95 a barrel on Oct. 4, the lowest intraday price since Sept. 24, 2010. Prices tumbled 17 percent in the third quarter, the biggest quarterly decline since the financial crisis in 2008 on concern that the U.S. and European economies would slow.

“Prices have climbed almost 40 percent in a very short time,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “I wouldn’t be surprised if there’s a short- term pullback. Once that occurs, there’s no reason to think we won’t resume this move higher.”

Futures in New York have settled above the 200-day moving average since Nov. 7, forming technical support. The 200-day average stood at $95.22 today. The next resistance is around $105, the 76.4 percent retracement of the drop from this year’s high of $114.83 on a Fibonacci study.

‘Psychological Resistance’

“Crude is carrying a lot of momentum as it takes out key psychological resistance at $100,” said Richard Ross, a technical analyst at Auerbach Grayson, a brokerage in New York. “Given the near vertical ascent from the $70s, a failure here would lead to a fast move down and retest of the 200-day moving average around $95.”

Oil briefly pared gains after the U.S. Energy Department reported that crude supplies at Cushing rose 890,000 barrels to 32 million last week.

“The inventory numbers are being trumped by the announced reversal of the Seaway pipeline,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “There won’t be any major impact until the second quarter of next year. It certainly makes sense to reverse the pipeline but it’s not a game-changer.”

U.S. Inventories

Nationwide crude oil stockpiles fell 1.06 million barrels to 337 million, according to the report released at 10:30 a.m. in Washington. A 1.2 million-barrel decline was expected, according to the median of 13 analyst responses in a Bloomberg News survey.

Oil volume in electronic trading on the Nymex was 1.11 million contracts as of 3:12 p.m. in New York, the first day over 1 million since Oct. 25. Volume totaled 743,768 contracts yesterday, 12 percent above the three-month average. Open interest was 1.36 million contracts.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net