Where is Crude Oil Headed?

09/28/2013 7:00 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue shares his outlook for crude oil and explains why the type of crude oil and where it is located determines the price you may be paying.

SPEAKER:  Thanks for joining us.  My guest today is Elliott Gue.  Hi Elliott and thanks for coming by.

ELLIOTT GUE:  Thanks for having me.

SPEAKER:  So what’s going on with oil prices?  It’s so strange because I’m looking at it certainly from the retail end.  I go to get gas one week and where I live in Tennessee, it is $3.19 and then the next week it’s $3.39.  There seems to be no rhyme or reason.

ELLIOTT GUE:  Right, right.  Oil prices have been very volatile this year and really the key thing to remember is that there’s not one price of oil.  There are many different types of oil out there.  In the US when you ask people what’s the price of oil?  Typically they’ll quote to you West Texas Intermediate or WTI crude oil, which is a light, sweet crude oil delivered to Cushing, Oklahoma, and that price has been much lower historically over the last year or so than the price of Brent crude oil which is the key international benchmark so what we’ve seen this year is Brent oil prices have been pretty much flat this year but WTI prices have rallied to almost the same level as Brent.  In fact, at one point in July, WTI prices actually rallied above the price of Brent.  The main reason for this actually has to do more with pipeline capacity than supply and demand.  What’s been happening is as most of the listeners are aware, US oil production has been rising over the past four years primarily because of production from a lot of these shale fields so places like the Bakken shale in North Dakota, the Permian Basin of Western Texas, the Eagle Ford Shale in South Texas.  The problem is there’s not enough pipeline capacity to move that oil from the middle of the county or from landlocked parts of the country to the Gulf Coast so identical oil late last year in Midland, Texas, and West Texas, was trading at almost a $20 a barrel discount to the same oil in Cushing, Oklahoma, even though it’s not that far away from them.  The reason was there just wasn’t enough pipeline capacity.  The good news is that there’s more pipeline capacity opening up,

SPEAKER:  Although it’s controversial too.

ELLIOTT GUE:  It is controversial but we are seeing a lot more, for example, the Keystone Pipeline which is subject to so much debate, part of that pipeline’s already been built and is flowing oil.  The part that goes between Cushing and Houston so that is actually moving a lot of oil out of the middle of the country to the coast.  What’s controversial is the part of the pipeline that extends up to Canada.

SPEAKER:  Going north, right?  Yes.

ELLIOTT GUE:  So we’re seeing a lot of the smaller pipelines moving from places like Cushing to the Gulf Coast or Midland, Texas, to the Gulf Coast.  Those are going ahead and getting built and approved no problem, and because that capacity is coming on stream, in addition to that, we’re seeing more rail capacity so a lot of companies are loading oil onto tanker cars and shipping it to anywhere that they have a market.  For example, Tesoro Refining, which is one of the biggest refiners in the country, is working on a project to take oil from the Bakken shale, transport it west to Vancouver, the Port of Vancouver in Washington, not the Canadian city but the port in Washington state and then barge it to Los Angeles to be able to get cheap oil from the middle of the country to California.

SPEAKER:  That sounds expensive.

ELLIOTT GUE:  It sounds expensive.  It costs them about $9 a barrel to move it to the Bakken to the Coast, and additional $4 or $5 a barrel to barge it down, but you got to remember that California doesn’t have a lot of pipelines to other parts of the country so they really haven’t had access in the state to oil from the middle of the country.  They’ve been importing oil from Saudi Arabia at Brent-like prices at $20 and $30 a barrel premiums so that’s a major relief for them to get that cheaper oil and so what you’ve seen in the near term is the price of WTI has come up because more WTI is getting moved out of the middle of the country to the Coast.  Going forward though, I think you’re going to see some of those discounts open up again and so you’ll probably see US oil prices remain at a considerable discount to global oil prices.  The biggest beneficiaries of this are producers in the US that have been selling oil at reduced prices so look at companies for example working in the Permian Basin of Texas.  A company like, let’s trust SandRidge Permian Trust, symbol PER.  They’re going to get much higher realizations for their oil because they now have pipeline capacity to move it to the Coast. 

SPEAKER:  Makes sense, great.  Thank you Elliott.

ELLIOTT GUE:  Thanks for having me.

SPEAKER:  And thanks for joining us at the MoneyShow.com Video Network. 

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