Oil Prices Waver as Key Pipeline Shuts Down for Repair
December 12 2017 - 11:16AM
Dow Jones News
By Georgi Kantchev
Global oil prices wavered between gains and losses Tuesday as
traders weighed the impacts of the shutdown of a key European
pipeline.
Light, sweet crude for January delivery was recently down 30
cents, or 0.5%, at $57.69 a barrel on the New York Mercantile
Exchange. Brent, the global benchmark, fell 30 cents, or 0.5%, to
$64.39 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."
Brent prices rose to the highest level since 2015 before
reversing losses, trading as high as $65.83.
"You've got one of the most important pipes on the planet down,"
said Bob Yawger, director of the futures division at Mizuho
Securities USA Inc. "The price slide would imply to me that the
start time on the pipe has been shortened."
Ineos said 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 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.
"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 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.
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.
Gasoline futures rose 0.4% to $1.7340 a gallon and diesel
futures rose 0.3% to $1.9558 a gallon.
--Stephanie Yang and Neanda Salvaterra contributed to this
article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com
(END) Dow Jones Newswires
December 12, 2017 11:01 ET (16:01 GMT)
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