Here is What’s Happening to U.S. Crude

Enterprise Products Partners (NYSE:EPD) and Enbridge Energy Partners (NYSE:EEP) are contributing to record levels of oil supplies held at the transit hub in Cushing, Oklahoma. The 500-mile, 30-inch diameter Seaway Pipeline, a joint venture between the two oil companies, resumed service on Friday with an improved capacity of 400,000 barrels per day, an increase of 150,000 barrels.

With the pipeline’s expansion enabling increased volumes of crude oil from the Midwestern United States to reach refineries along the Gulf Coast, prices on Europe’s Brent crude oil benchmark fell. On Friday, Brent for February settlement dropped 1.5 percent to $110.27 per barrel on the London-based ICE futures exchange, which was the greatest decrease since December 6. As a result, the gap between the European benchmark and the U.S.-traded West Texas Intermediate crude oil shrank by $1.01 to $17.06 a barrel, the narrowest premium since September 21.

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“This is taking the pressure off Brent crude and could translate into lower product prices across the board,” Price Futures Group senior market analyst Phil Flynn told Bloomberg. “You’re alleviating the glut, getting it out to the refiners who can actually buy the stuff, and they can put more product out into the global marketplace.”

Not only will the pipeline’s increased capacity shrink the oil glut in Cushing, it will also provide much-needed crude oil to refineries. As Edward Jones analyst Brian Youngberg told The Wall Street Journal, oil processors are “hungry” for a supply of inexpensive, domestic crude. “They will take as much as they can,” he said. “The big picture is Gulf Coast refiners are looking to run at full capacity–to take advantage of low WTI prices and low natural-gas prices and export into markets that are priced much higher.”

With the help of the pipeline, all of the light, sweet crude processed by Gulf Coast refineries by the end of this year will have been produced in the United States, a spokesman for Valero Energy Corp (NYSE:VLO) said.

In addition to the Seaway Pipeline, several projects are under construction in the U.S. that are meant to strengthen the infrastructure needed to handle the boom in domestic oil production. A new conduit will be built along the existing Seaway Pipeline, which is estimated to bring the line’s total capacity to 850,000 barrels a day by mid-2014.

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