Oil Prices Climb as Key Pipeline Shuts Down for Repair -- Update
December 12 2017 - 9:55AM
Dow Jones News
By Georgi Kantchev
Global oil prices pared gains after jumping to their highest
level since 2015 as the shutdown of a key European pipeline sapped
more crude from a market where supply has already tightened due to
production cuts.
Brent crude, the global benchmark, was up 0.7%, at $65.14 a
barrel on London's Intercontinental Exchange. On the New York
Mercantile Exchange, West Texas Intermediate futures were trading
up 0.5%, at $58.27 a barrel.
Late Monday, British refining and chemicals company Ineos said
it would shut down the Forties Pipeline System for several weeks
after discovering a widening crack. The pipeline system delivers
around 40% of U.K.'s North Sea oil and gas production, carrying
about 445,000 barrels of crude a day.
"The pipeline outage is the big driver right now," said Tom
Pugh, a commodities economist at Capital Economics. "When you take
out so much oil out of the market, that inevitably adds to the
tightness."
The outage comes as production cuts by the Organization of the
Petroleum Exporting Countries and other major producers like Russia
takes oil off what has been an oversupplied market. Last month,
OPEC and its allies agreed to extend their production cuts by nine
months to the end of 2018.
Boosted by this deal, which was first agreed late last year,
Brent is up 15% in 2018 while WTI is up 9%.
"Even if you do not believe that the extension of the
OPEC/non-OPEC deal will boost the global rebalancing process you
would have found it impossible to resist of buying oil futures,"
said Tamas Varga, analyst at PVM brokerage. The "closure of the
Forties pipeline system for weeks is one of the most significant
unplanned crude oil shortage we have seen this year," he said.
Ineos said that repairs of the Forties Pipeline System could
take several weeks after the worsening of an onshore hairline
fracture south of Aberdeen, Scotland. A small amount of oil has
seeped from the pipeline, the company said, but the leak has been
contained.
The rally in oil prices Tuesday also gave a boost to energy
shares, with oil and gas stocks in the Stoxx Europe 600 rising
1%.
With some of the Forties crude underpinning the Brent crude
benchmark, the global price was rising faster than WTI benchmark.
This boosted the spread between Brent and WTI, trading around $7 a
barrel, a welcome development for U.S. exporters to Europe.
The run-up in prices, however, could also prove self-defeating,
as expensive crude incentivizes U.S. shale producers to ramp up
activity. The U.S. oil rig count--the number of active rigs
drilling for oil--has increased for three weeks in a row.
"The Forties outage gives U.S. producers a chance to get on the
market and hedge their output," Mr. Pugh said.
Producers typically take advantage of rising oil by using hedges
to lock in the higher prices. According to Citigroup, U.S.
suppliers sped up hedging activities for their 2018 production in
the third quarter. Over the course of the last quarter the hedge
ratio for 2018 production jumped from 12% to 27%, the highest level
of hedges since 2014, the bank said.
"High levels of hedge cover of 2018 production could bolster the
growth outlook for U.S. shale next year," the bank said in a
report.
Among refined products, Nymex reformulated gasoline
blendstock--the benchmark gasoline contract--was up 1.7%, at $1.76
a gallon. ICE gas oil, a benchmark for diesel fuel, changed hands
at $581.75 a metric ton, up 1.6% from the previous settlement
Neanda Salvaterra contributed to this article
Write to Georgi Kantchev at georgi.kantchev@wsj.com
(END) Dow Jones Newswires
December 12, 2017 09:40 ET (14:40 GMT)
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