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Trader's Corner

This week’s Trader’s Corner looks at big news for crude.

U.S. crude production continues to climb at a fairly steady pace.

Most of the new production has been in the Midwest. This has caused too much crude to accumulate in the middle of the nation, specifically at the U.S. crude trading hub at Cushing, Okla.

The Cushing crude inventory chart above shows that inventory was easily setting new five-year high marks at the beginning of the year. However, inventory started declining after the middle of the year.

The Seaway pipeline was reversed early this year to carry crude away from Cushing to the U.S. Gulf Coast. With a 400,000-barrel-per-day (bpd) capacity, the Seaway initially pulled down crude inventory. The drawdown in Cushing inventory supported West Texas Intermediate (WTI) crude prices.

But rising production eventually halted the drawdown of inventory, and it began to build again. Crude prices began to fall in late August, with the leveling off of Cushing inventory a key reason.

But this past week, crude prices began to move higher again. Part of the reason was a big draw in total U.S. crude inventory. The U.S. Energy Information Administration announced U.S. inventory had fallen 5.585 million barrels. Just as critical as the overall U.S. crude drop was a minor 0.018-million-barrel draw in Cushing crude inventory. The rise in Cushing inventory had finally stopped.

The decline was partly due to a completion of U.S. refinery maintenance programs. Refiners processed an additional 555,000 bpd of crude during the week ending Nov. 29 compared to the previous week. Refinery capacity utilization rates jumped from 89.4 to 92.4 percent.

But the inventory draw and refinery news were only part of the reason WTI crude prices jumped and the discount WTI was trading to Brent crude dropped more than $3. The other was crude pipeline news.

TransCanada announced on Tuesday it would open a segment of its Keystone XL line between Cushing, Okla., and Port Arthur, Texas, by Jan. 3 at a capacity of 700,000 bpd. Later the company told shippers the line would not open until mid-January.

Nevertheless, the line should once again bring down Cushing crude inventory and allow U.S. Gulf Coast refineries to use more North American crude. The result should be a further reduction in U.S. waterborne crude imports. This is good news for U.S. crude producers and even good news for the United States as it makes the nation less dependent on foreign oil. However, from a U.S. consumer perspective, it may not be such good news.

The surplus in Cushing had WTI crude, the U.S. benchmark, trading as much as $17 below the global benchmark crude just before Thanksgiving. This past week, the spread contracted to around $14.

It is highly likely WTI crude prices will climb as the TransCanada line becomes operational and Cushing inventory falls. That will support U.S. propane and other refined products prices.

The hopes are that all of this new production will bring down the price of Brent crude and limit the upside movement of WTI. Propane retailers and consumers hope they do not see another $14 uptick in WTI crude prices as Brent crude retreats toward WTI. Right now the global crude market looks well supplied, so the odds are Brent comes down. But if geopolitical issues suddenly get under Brent and push it higher, we could see a rapid rise in WTI as it plays catch-up.

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Crude and propane prices surged following the Thanksgiving holiday. Low propane inventory levels and cold weather were supportive. Crude surged on the announcement of the TransCanada Cushing, Okla., to Port Arthur, Texas, crude line opening next month and a big draw on U.S. crude inventory.

Monday: Propane and crude prices surged following the Thanksgiving holiday. Cold weather supported propane and good U.S. manufacturing data supported crude.

Tuesday: A major rally in propane and crude prices continued. WTI crude was getting support from an announcement that a new 700,000-bpd crude line between Cushing, Okla., and Port Arthur, Texas, would open in January. Cold weather remained the key driver for propane.

Wednesday: Draws in crude and propane inventory that exceeded expectations helped fuel a strong propane and crude price rally. The EIA reported a 2.665-million-barrel draw in propane inventory and a 5.585-million-barrel draw in U.S. crude inventory.

Thursday: The rally in propane prices slowed as it looked like some traders were stepping in to take profits on the recent gains. The rally in crude also slowed despite good U.S. economic news.

Friday: Propane prices regained traction as the profit taking of Thursday eased. A major cold front throughout the United States and ice storms through the heartland supported prices. Crude was starved for investment dollars as money poured into U.S. equities following a good non-farm employment report that had jobs up 203,000 in November and the unemployment rate down to 7 percent from 7.3 percent.

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