Two words can describe the crude oil markets from 2012:
Supply & Demand. The two global benchmarks saw substantial moves where
overseas inventories were light, while in the US, inventories were at all-time
record highs.
The US benchmark WTI closed out the year down 7%, the first
annual decline since the global financial crisis in '08. New drilling methods
have unveiled discoveries with new supplies of oil and natural gas. This
especially in the Marcellus shale region of the US where I am currently living
right now. There is a lot of controversy from all of this drilling, but I think
the benefits outweigh the costs. There are people in my area who could not find
work for months, even years who now have a steady income. The concern is what
would happen when the area is out of places to drill, though by then the entire
economy should have recovered enough to make it easier to switch in and out of
jobs.
On the other hand, the European benchmark Brent that tracks
the cost for many foreign buyers as well as the US coast, is up 3% as supplies
are constrained. The increase in the price of Brent this year was concerning
due to uncertainties in Europe, but nonetheless, other parts of the world
continue to see demand for oil.
The spread between WTI crude and Brent reached its widest
point ever in 2012, at one point Brent was more than a $25 premium to WTI,
though WTI did catch up and gain in the last remaining weeks of the year to go
just under $20 to the price of Brent. The gap between both benchmarks has widened
and narrowed based on the oil markets views on how quickly pipelines will help
reconnect US oil supplies stuck in Cushing, Oklahoma to the global market.
Natural Gas was also very volatile this year, at one point
going below $2.00 or down 36%, but finished the year up 12%.
The graph above shows why Brent has traded to a premium all
year to WTI. Crude oil supply in Cushing is at an all-time high and looks to
continue its upward trend. From January 1st of 2012 till the last week in
December, supplies are up 70%. There are currently close to 50 Million barrels
of oil stuck in Cushing that are going nowhere due to lack of pipelines. As a
result, gas prices have stayed high throughout the US (as a comparison, when gas
prices were at all-time highs in 2008, oil was $150 a barrel, we are only 50
cents off all time highs in gas prices, but oil prices are down 40% from their
all time highs). If we could get this oil out of Cushing and into the hands of
others in the US, we would see a drastic decline in the price of gasoline.
Above are graphs of Crude oil and RBOB Gasoline. There seems
to be a tight correlation, but currently gas prices are at a 8% premium to oil
prices (Oil is 38% off its all-time high while at the same time, gas prices are
30% off their all-time high). This shows that gas and oil prices are not
trading in tandem.
Above is retail for a gallon of gas, what someone would pay
for at the pump. Current prices closed out 2012 20% below their all-time high.
Another reason we have been seeing lower WTI crude prices
and higher Cushing supplies is due to the amount of domestic crude production in
the US this past year. Domestic production saw its biggest yearly percentage
increase since the 1980's where it was up some 20%. Looking at wider graph, the
pattern was a long-term down trend, reversed this year. With the exploration of
more oil in the Marcellus region and North Dakota region, we see more supply
through the US.
With all of the data presented above, what do I expect to
happen for 2013? Well, the only way to reduce gas prices and transport this is
through building more pipelines. In November of 2011, Enterprise Partners said
that they would reverse the Seaway Pipeline to carry crude from Cushing, OK to
the country's main refining center on the Gulf Coast. When that occurred, the
Brent/WTI spread narrowed $8, but widened again in 2012 as I mentioned numerous
times above. US oil output surged and current pipelines could not handle all of
the excess crude.
Throughout 2012, I was watching levels of US crude supply
and saw that this Seaway Pipeline reversal had relatively no effect on
stockpiles this year. Still, modestly increased shipments of oil from the
Midwest to the Gulf Coast refineries have started displacing oil imports. Crude
imports fell 9% in October from a year earlier (2011) to 8.1 million barrels,
the lowest amount imported in 13 years. This year I believe could be a turning
point as new pipelines start moving oil. Goldman Sachs predicts that the
WTI/Brent spread will fall to $10 as more oil gets pushed through the Seaway
Pipeline.
The estimated completion time for the Seaway Pipeline should
be sometime in Q1 of this year, pushing through some 400,000 barrels a day
(currently, there are 150,000/day). Also, the Gulf Coast Pipeline, (Keystone
XL) being constructed by TransCanada, should be complete by late Q2 to early Q4
of this year, which could carry an estimated 830,000 barrels of oil per day.
Another pipeline extension from Cushing to the Gulf Coast is
the Seaway Twin, expected to be online by mid 2014. This will be expected to
carry 450,000 barrels a day.
As all of these pipelines come online within the next year,
we will finally begin to see supplies in Cushing and elsewhere decline, getting
prices at the pump down as well. Building these pipelines is beneficial for
everyone to consumers and those in need of a job in a rough economy. I also
agree with analysts that the spread will contract this year, putting pressure
on US refiners who profit from a widening spread. I believe this is the year to
own pipeline names and short the refiners as more oil will finally begin to
come online.
One of the pipeline names I like long-term that will be benefiting from a lot of the production of these pipelines is Enterprise
Products. They are the company who plans to build both of the Seaway Pipelines
to be completed next year. They had a volatile 2012, ending up 5% which in my
opinion would have closed out the year much better if it was not for the fiscal
cliff drama (They are already up 6% in the first few trading days of the year.)
Enterprise Product Partners is one of the largest MLPs in the United States.
The company has over 21,000 miles in Natural Gas pipelines and over 17,000
miles of Natural Gas Liquids and Petrochemical pipelines. With the huge boom in
Natural Gas over the past few years, they also stand to benefit from this as
well. A major advance like the expansion of the Seaway Pipeline is a positive
achievement for the stock price. By the middle of this month, EPD expects the
new full capacity of 400,000 barrels per day to be in service. This represents
an increase of 250,000 barrels per day from the previous 150,000 barrels per
day of capacity.
From May of last year, the shipping rate for a barrel of
crude through the pipeline was $3.82. Adding more pipelines will help with
their bottom line, along with growing cash flow. Their Operating cash flow was
604M in March of '12, and current Operating cash flow as of the end of September
is 1.6B. They continue to maintain a healthy balance sheet while paying a 5%
dividend yield, which amazingly has increased every quarter for the past 9
years (yes, even during 2008). Their shares have outperformed their main
competitor Kinder Morgan by 8% this past year. I easily anticipate Enterprise
to eclipse $60.00 this year on their increased revenue from online pipelines.
Above is a 5 year chart of Kinder Morgan, TransCanada and
Enterprise (blue line)
I anticipate WTI Crude prices to close out 2013 10% above
where they ended in 2012 which is exactly $100 a barrel. I also believe late
spring and into early summer we could see the price of WTI to be above $105 but
will level out. The range for WTI this year will be between $85 and $105, which
is less volatile then the past year's range of $33 ($110-$77). Long-term oil
prices will remain elevated due to increased demand, the employment rate and
oil prices are highly correlated and as we see more people with jobs, they will
end up consuming more oil by driving their cars. Within a few years, there is
no doubt in my mind the price for a barrel of oil will be over $125, by then we
will be just on the path to new and less expensive ways to fill up our tanks or
recharge our cars. Though until that time, get ready for elevated gas prices
and WTI crude oil.
No comments:
Post a Comment