Oil Prices: Brent-WTI Spread Narrows, But Keystone Delay Keeps It Alive

The reversal of the Seaway Pipeline last week fed substantially higher WTI crude oil prices, as it will help ease the bottleneck at Cushing, Oklahoma.  The price spread with Brent crude will remain, though, given pipeline under capacity (as Keystone XL remains delayed) and rising output from Canada�s oil sands, according to RBC Capital markets which sees the Brent-WTI spread averaging $9 per barrel in 2012 and $7 per barrel in 2013.  Oil focused U.S. E&Ps are poised to benefit, with RBC�s average EPS estimates for 2012 up 6% to 11% for 2013.

For some time now, the benchmark crude oil contract in the U.S., West Texas Intermediate, traded at a substantial discount with Brent contracts, the international benchmark.  Behind the scenes, a chokepoint at Cushing, where the contracts are priced, held down the value of WTI, creating the so-called Brent-WTI spread.

Oil prices fell hard on Monday along with the rest of the markets, amid fear that the deficit Super committee in the U.S. will fail to agree on budget cuts, while Europe continues to teeter on the brink of disaster.  Front month WTI contracts were down 1.3% to $96.36 by 12:34 PM in New York, while Brent fell 1.2% to $106.26.

Last week, though, oil prices in the U.S. rallied after Enbridge announced it bough ConocoPhillips� 50% interest in the Seaway Pipeline, which would be reversed to carry crude from Cushing to the Gulf Coast.  The Seaway pipeline would allow for an initial capacity of 150,000 barrels per day by mid-2012, reaching 400,000 daily barrels after the addition of pump stations by early 2013.

The speed at which markets reacted was impressive, forcing RBC Capital Markets to reassess their oil price outlook.  The analysts raised their WTI estimate for 2012 by $10 to $100 per barrel in 2012 and by $6 to $106 per barrel in 2013.  Estimates for Brent remained unchanged at $109 per barrel in 2012 and $113 per barrel in 2013.

�Companies focused on WTI-tied basins, particularly those with operations in the Permian, Bakken, and Eagleford are most positively impacted,� read the note released Monday.  Among those showing the most upside are Plains Exploration, Whiting Petroleum, and Oasis Petroleum.

The Seaway reversal is still not enough, though, to alleviate the bottleneck at Cushing.  �While the Seaway pipeline reversal should serve to reconnect mid-continent and Brent prices, it�s not the whole enchilada,� wrote the analysts, who added �the U.S. delay on a decision regarding the 500,000 bbl/d Keystone XL pipeline against the backdrop of rising Bakken and Canadian oil sands production will necessitate additional pipeline capacity down the line.�  They estimate Canadian oil sands production to climb from 1.4 million barrels per day in 2011 to 2.4 million barrels in 2015.

Thus, the WTI futures curve remains in clear backwardation, which means shorter-dated contracts are more expensive than those farther in the future.  WTI contracts for January 2012 delivery traded at $95.98, while contracts for delivery on January 2013 traded at $94.79 and those for delivery on December 2015 stood at $90.23.

RBC�s analysts see a few other names in the E&P sector as top picks.  Anadarko Petroleum is one of them, poised to benefit from drilling catalysts across its large international properties.  Forest Oil is another, which is set for 15% to 20% EBITDA growth given its �increasingly liquids-rich drilling focus.�