SINGAPORE (Reuters) – Middle East crude traders are bracing for higher prices after a blast crippled the main pipeline shipping Canada’s heavier crude to the U.S. Midwest, anticipating refiners may have to scramble for supplies.
Pipeline operator Enbridge shut down its network of four parallel pipelines that pump Canadian crude to the United States, and warned that the larger two lines carrying mainly medium and heavy grades could remain shut for a while.
Landlocked inland refiners such as Flint Hills Resources’ 280,000 barrels per day (bpd) refinery in Rosmount, Minnesota, that rely on the pipeline for the baseload supplies, would have to drag additional shipments inland from the Gulf or East Coast that could reverberate.
“The only way to supply refiners that do not have Canadian crude is to send crudes from the Gulf Coast up the pipelines. These are mostly light sweet crude,” a Singapore-based trader said.
That will create a knock-on impact for demand for similar high-sulphur, dense crudes that can be shipped to the United States such as Russia’s main Urals blend or Middle East grades such as Oman, which rarely travels to U.S. shores.
Much will now depend on the duration of the outage, and whether the U.S. government reaches into its 700 million-barrel Strategic Petroleum Reserve (SPR) to try to fill the gap — although logistics may make that tricky.
“The problem is that the SPR oil is all in PADD III Gulf Coast, while the crude imports that have been lost are all in PADD II Midwest, and there is limited transport capacity between the two,” Sempra analyst John Kemp said.
Traders are also looking to the Organization of the Petroleum Exporting Countries to increase output when it meets on Dec. 5 in Abu Dhabi, which might help temper the impact of the outage.
The explosion on Wednesday about 3.0 miles (4.8 km) southeast of its Clearbrook, Minnesota, terminal shut down a line that carries nearly one-fifth of U.S. crude oil imports.
One of the set of four pipelines will require repairs and regulator inspections, while the largest is “not likely” to start up any time soon, Larry Springer, a spokesman for Calgary, Alberta-based operator Enbridge Inc, said on Thursday.
Traders said the Brent-Dubai spread, used as a proxy for the premium of sweet grades of high-sulphur or sour crude, could narrow as a result of the stronger pull.
The spread has hovered above $5 a barrel for the past month and a half, indicating stronger demand for light sweet crude, and rose toward $6 as Brent futures prices outpaced the less liquid over-the-counter Dubai swaps market.
But in Early August last year, when BP shut down its Alaska Prudhoe Bay field due to a pipeline leak, the Brent-Dubai Exchange for Swaps (EFS) halved from around $5.65 to $2.80 a barrel within one month, as West Coast refiners rushed for Asian cargoes.
Even if U.S. refiners do not pull Middle East crudes directly, European markets facing the loss of Urals may see increased demand, setting up a West versus East tug-of-war during the peak of season demand for the northern hemisphere winter.
Only about a handful of Middle East crudes from Oman, Abu Dhabi and Qatari crude are traded freely on the market, amounting to around 4 million barrels per day (bpd), but even some of that volume is contracted under annual contracts.
Higher demand from Japan and South Korea in winter for kerosene-rich Abu Dhabi crude, could further limit available supplies and help push prices higher.