Keystone pipeline shut down prompts rise in oil prices

Oil prices hit two-year high

US oil prices hit a two-year high Friday on reduced crude stocks in the wake of the shutdown of the Keystone pipeline after a spill in South Dakota last week.

Earlier in the session, US WTI crude hit $58.92/barrel, the highest its been since July 2015, and Brent crude prices rose to $63.56/barrel.  The Canadian Crude Index was up to $41.06.  Prices slipped slightly as trading continued.

Trading volumes were light on Friday due to the US Thanksgiving Day holiday.

On Nov. 16, TransCanada shut down its 590,000 barrel per day (b/d) Keystone pipeline after a spill occurred about three miles southeast of the town of Amherst, SD.

At this time, it is unclear when the Canada to US pipeline will reopen.  The line carries Alberta oil sands crude to Cushing, Oklahoma, the delivery point for WTI futures.

The shutdown of the line means there will be less crude in storage.

“We’re expecting to continue seeing draws out of Cushing, which turned the WTI market into backwardation,” Tariq Zahir at Tyche Capital Advisors told Reuters. Backwardation is a market structure where prompt prices are higher than future values.

Zahir warned “But all of these gains could go right down into the tubes a week from today if Russia says they don’t want to go along with any OPEC deal. Or, if we get grumblings from Iraq or Iran.”

OPEC and some non-cartel countries have helped reduce the global glut of crude by reducing their production by a total of 1.8 million b/d.  The deal is set to expire in March 2018, but many participants have voiced support for extending the deal to the end of 2018.

On Nov. 30 OPEC will meet in Vienna to discuss prolonging the pact.  In recent weeks, Russia has sent mixed messages about the prospect of extending the time frame of the agreement.

“With the majority of OPEC members endorsing an extension, Russian support is the key risk,” Reuters reports Jon Rigby, head of oil research at UBS, wrote in a note.

On Friday, Reuters reported that Russia’s Energy Minister Alexander Novak says his country is ready to support a deal extension, but did not commit to how long the pact should be prolonged.

“We see that 50 percent of oil stockpiles have been removed, the oil price has reached its balance,” Novak told RBC TV.

Rising US oil production has been a stumbling block for larger oil price gains.  Since mid-2016, US production has risen to a record 9.66 million b/d.