Lower inventories, Keystone shut down boost oil prices

Oil prices rise in thin trading on Thursday

In spite of rising US crude production, oil prices rose in thin trading on the Keystone pipeline shutdown and data showing a decline in US crude stocks.

US WTI hit a two-year high, rising 54 cents to sit at $58.56/barrel by 1:30 p.m. EST.  Benchmark Brent rose by 21 cents to $63.20 and the Canadian Crude Index was at $40.73.

The Thanksgiving Day holiday in the US quieted trading on Thursday.

US WTI prices have risen more sharply than Brent recently and have narrowed the gap between the two that started to open this summer and peaked in early November.

At the beginning of the month, the discount was $6.70.  Now, US crude futures for delivery in January are trading at $5 a barrel below Brent.

In a column for Reuters, John Kemp wrote “In reality, the Keystone spill has accelerated an adjustment of Midwest stocks and prices that had already begun as traders responded to the huge price differential by routing more crude to the coast.”

Analysts expect crude stockpiles at the US storage hub located in Cushing, Oklahoma, to drop in the coming weeks after a spill in South Dakota shut down the Keystone pipeline.  The Alberta to US Gulf Coast pipeline transports 590,000 barrels per day (b/d) of oil sands crude.

“Inventories should drain sharply in the next few weeks given the uncertain timeline for a restart of the Keystone pipeline, a major artery for Canadian heavy oil barrels into the heart of the Cushing hub,” Martin King, a GMP FirstEnergy analyst in Calgary told Reuters.

According to the US Energy Information Administration, US crude stocks fell by 1.9 million barrels in the week ending Nov. 17 and are down by 15 per cent from record highs in March.

US crude inventories now sit below 2016 levels.  Commercial fuel inventories in the US also dropped, prompting a rise in oil prices.

However, US output has risen by 15 per cent since mid-2016 to a record high of 9.66 million b/d.

The rising production in the US is threatening to kneecap OPEC’s efforts to cut the global crude glut.  The cartel along with some non-OPEC members have cut their output by a total of 1.8 million b/d to rebalance the oil market.

On Nov. 30, OPEC along with participating countries, including Russia, will meet in Vienna to discuss extending the agreement to the end of 2018.  It is currently set to expire in March 2018.

“Whatever OPEC will be discussing and … agreeing upon can be made redundant by the actions of U.S. suppliers, which are likely to hike up production in a similar order,” Eugen Weinberg, head of commodities research at Commerzbank told Reuters.

He added that an additional 800,000 to 1 million b/d in U.S. output next year would mean “attempts by OPEC to tighten the market may not be successful.”