November 16, 2011 / 3:34 PM / 6 years ago

U.S. oil soars past $100, Seaway reversal to ease glut

5 Min Read

NEW YORK (Reuters) - U.S. oil prices surged on Wednesday to close above $100 a barrel for the first time since June, propelled by news of a critical pipeline reversal that will ease a year-long oil glut in the Midwest.

In the most active trading session since Libya's civil war erupted in February, U.S. WTI surged more than $3 a barrel while Europe's Brent slipped 30 cents as traders rushed to buy back the roller-coaster Brent/WTI spread, betting that the two markers would once again trade largely in line.

Traders cautioned that Enbridge Inc's move to reverse the 350,000-barrels-per-day (bpd) Seaway pipeline to ship crude from Cushing to the coast would not completely eliminate the distortion in the U.S. domestic market. Bank analysts still rushed to narrow their forecasts for the spread, which has fallen by about a third from a record $28 a month ago.

"The reversal of the Seaway will likely accelerate the anticipated clearing of the Midwest surplus, reducing the reliance next year on expensive barge transportation," Goldman Sachs analyst David Greely wrote in a note to clients. The bank brought forward its $6.50 spread forecast by six months.

Prices shot higher after Canada's Enbridge (ENB.TO) and Enterprise Products Partners (EPD.N) announced the reversal plan on Wednesday, shortly after ConocoPhillips (COP.N) said it had sold its 50 percent share to Enbridge for $1.15 billion.

Rival TransCanada Corp (TRP.TO), meanwhile, said it could build the Cushing-to-Gulf-Coast leg of its proposed Keystone XL pipeline by early next year. pending consultations with the U.S. State Department.

Both proposals, if they materialize, are seen helping unclog a bottleneck that has pressured crude prices in the U.S. Midwest for about a year.

The volatile spread between Brent and West Texas Intermediate narrowed by some $3.50 a barrel, the second-largest move since early 2009. It ended just above $9 a barrel, a level last seen in March.

NYMEX WTI crude trading volume of nearly 1.2 million lots was the most since late February, according to preliminary Reuters data.

Brent's volume was also heavy, at over 700,000 contracts, more than 23 percent above its 30-day average.

The premium has been on a slide recently also due to the speedy return of supplies from Libya to markets in Europe, after having been shut down due to months of civil war that toppled Muammar Gaddafi.

Dealers cautioned that the spread would likely remain wide by historical norms for some time, even with new rail projects helping siphon more North Dakota and Canadian oil out of the Midwest to the premium markets on the coast.

"Seaway's full reversal has a net impact of around 400,000 bpd, which is a significant chunk but is still not the level needed to fully unlock the logistics bottlenecks (in the Midwest)," said Daniel P. Ahn, director and head of commodity portfolio strategy at Citigroup.

Brent crude for January delivery settled at $111.88 a barrel, falling 30 cents, having dropped as low as $110.14 early.

U.S. January crude closed at $102.60, rising $3.17, which sent the transatlantic arbitrage tumbling to $9.28. Brent's premium over WTI earlier fell to $8.30, the weakest since March 24, down from an intraday record of $28.10 on October 14.

U.S. December crude, which expires on Friday, settled at $102.59, gaining $3.22, after jumping to a session high $102.89, the loftiest intraday price since June 1. U.S. crude futures last settled above $100 on June 9.

Supportive u.s. Data

Economic and weekly petroleum inventory data also helped lift U.S. crude futures.

U.S. industrial output rebounded and consumer prices fell in October for the first time in four months, taking pressure off strapped households and giving the Federal Reserve more room to ease monetary policy.

Domestic crude stockpiles fell 1.1 million barrels, down for a second straight week, while distillate supplies, which include heating oil and diesel fuel, dropped for the seventh consecutive week, by 2.1 million barrels. <EIA/>

In Europe, the picture was much gloomier as France and Germany, Europe's two central powers, clashed over whether the European Central Bank should intervene to halt the accelerating debt crisis.

The euro fell to a five-week low against the dollar and yen as rising French and Italian borrowing costs heightened concerns about contagion in the euro zone debt crisis. <USD/>

"There's a focus on sovereign debt yields; they are still a concern and they are driving prices," said Olivier Jakob at Petromatrix in Zug, Switzerland.

Also highlighting the bearish outlook for developed economies, the Bank of England said Britain was on the brink of a contraction as the euro crisis weighs heavily, and inflation would fall well below target.

Additional reporting from Robert Gibbons and Janet McGurty in New York; Simon Falush and Dmitry Zhdannikov in London; Editing by Marguerita Choy and Dale Hudson

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