CHICAGO--(BUSINESS WIRE)--The acquisition by Canadian company Enbridge Inc. of a 50% stake in the Seaway oil pipeline and the reversal of crude oil flows at the Cushing terminal will not, in Fitch Ratings' view, put an end to the need for additional investment in similar Gulf Coast pipeline projects.
Still, as evidenced by today's reported cancellation of the proposed Wrangler pipeline project, the Seaway reversal will significantly ease the supply bottleneck at the Cushing oil supply hub while altering the outlook for Midwest refiners.
While the reversal is likely to support prices for landlocked West Texas Intermediate (WTI) crude and cut high inventories at Cushing, strong North American production growth and solid demand for pipeline capacity to Gulf Coast refineries should continue to support new project development. We believe that over the long term, Trans-Canada's Keystone XL project, while still subject to regulatory risk, is likely to proceed once State Department approval is received.
We expect the race to build new pipeline capacity to continue as Trans-Canada awaits regulatory approval for construction of Keystone XL, which would link Canadian oil sands production areas with Texas via the terminal at Cushing. The State Department indicated earlier this month that a review of Keystone's routing and environmental impact would delay the project's approval until early 2013. However, Trans-Canada may pursue fast-track approval of the Cushing to Gulf Coast portion of the project.
While yesterday's announcement drove a significant jump in the WTI price and a narrowing of the WTI-Brent spread (now less than $10 per barrel), the need for significant alternative transportation capacity from Cushing to the Gulf is likely to spur continuing investment in trucking, barge and rail capacity to supplement pipeline flows.
Enbridge and Enterprise Products Partners LP expect capacity for the reversed Seaway pipeline to reach 150,000 barrels per day by second-quarter 2012 and ultimately 400,000 barrels per day in 2013.
As the Brent-WTI spread narrows and the glut of midcontinent supplies is eroded, margins for Midwest refiners are expected to moderate from currently high levels. By contrast, beneficiaries of a narrowing Brent-WTI spread include upstream producers in landlocked North American basins, as their price realizations should rise relative to the Brent benchmark.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.