Gulf Coast pipeline reversal to lift oil prices, analysts say

“I think it’s very well established that more transportation capacity has to be added out of Cushing to prevent stockpiles of crude oil and price discounting for Canadian crude,” he said in an interview.

Enbridge (TSX:ENB) and its partner, Enterprise Product Partners, plan to reverse the flow of the northbound Gulf-to-Cushing Seaway pipeline as early as next year, helping to relieve some of the glut at the massive storage hub.

Scotiabank commodities specialist Patricia Mohr also said the increased access to the lucrative Gulf market will help buoy West Texas Intermediate prices.

“I think that, plus a number of other developments, probably will cause me to move the oil price forecast up. For next year I’m going to have WTI averaging at least US$95 and I may move it up further,” Mohr.

Mohr said that WTI is not as good a benchmark for crudes produced in Canada and the United States as it used to be. Synthetic crude produced by oilsands companies like Suncor Inc. (TSX:SU), for instance, has tracked higher.

“However if WTI goes up, it’s a positive development,” she said. “Forces are moving in the right direction.”

Crude prices are linked to what consumers pay at the pump, since products like gasoline and diesel are derived from oil. But the NEB’s Rankin said the ultimate impact of higher WTI on consumers’ pocketbooks isn’t as clearcut as one might think.

“There’s two separate markets. The petroleum product markets are linked to the crude oil markets, but at the same time the prices that are charged for petroleum products are not necessarily strictly governed by the crude oil input costs,” he said.

U.S. Midwest refineries use WTI crude, so lately they’ve been able to buy their feedstock for cheap. However, the fuels they produce are linked more closely to higher world oil prices, meaning they’ve been enjoying hefty profit margins for the past several months. A rise in WTI would squeeze their bottom line.

Meanwhile, many refineries that serve major population centres in Canada and the United States — especially those near coastal waters — buy crude at world prices, specifically North Sea Brent. So a shift in WTI won’t change much for them.

WTI surged past US$100 per barrels for the first time since July on Wednesday, when Enbridge and Enterprise announced their Seaway plan. But jitters over the European debt crisis pulled crude below US$97 a barrel on Friday.

While the pipeline news will have an impact, Rankin said economic news will dictate much of how crude prices behave next year.

“We’ve seen rapid swings in oil prices based on news from the European Union or economic data in the U.S.,” he said

“You’ve got geopolitical events in the Middle East particularly, and that moves markets very quickly as well.”