Skip to main content

The Globe and Mail

Oil industry’s upside of infrastructure woes

One up side of oil industry infrastructure bottlenecks for refiners is that stranded domestic West Texas Intermediate sells at a steep discount to globally traded Brent crude. Even when pipelines catch up, home-produced oil may still be cheaper.

TODD KOROL/REUTERS

U.S. oil refiners are benefiting from infrastructure bottlenecks. One result is that stranded domestic West Texas Intermediate sells at a steep discount to globally traded Brent crude. Even when pipelines catch up, home-produced oil may still be cheaper.

The WTI discount to Brent only opened up in 2011 as U.S. oil production accelerated far beyond pipeline capacity. Unable to get crude to the coast where it could compete directly with imports, explorers in oil-rich states like North Dakota had to accept lower prices inland. Cheaper feedstock, meanwhile, meant fatter profit margins for refiners.

It's not a fleeting effect, either. Nine months ago crude futures markets indicated that investors thought the gap – which peaked at about $26 (U.S.) a barrel last September – would narrow and return to single-digit dollars by the end of next year. But the difference is still around $21, close to the high for this year, and futures prices now suggest it could remain above $10 until 2015.

Story continues below advertisement

A big reason is that rising oil production looks likely to keep infrastructure in catch-up mode. U.S. production of oil and liquids associated with gas deposits is on track to climb by nearly 70 per cent to 15.6 million barrels a day by 2020, according to Citigroup.

And anyway, building pipelines linking inland states to the coast might not eliminate the price gap. Offshore Gulf of Mexico production may climb sharply too, Citigroup reckons. That may mean that even if the price difference between WTI and Brent narrows, a discount could emerge in Louisiana Light Sweet crude, the benchmark for America's Gulf oil.

The cost benefit that stems from the WTI discount has already created something of an industrial resurgence. At the end of last year, the United States took over from Russia as the world's largest exporter of the oil products produced by refineries. And the shares in HollyFrontier and Marathon Petroleum, two big U.S.-focused refiners, are up 70 per cent and 50 per cent, respectively, so far this year. U.S. oil processors will be cheered by the thought that their advantage could last a while yet.

Report an error
Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.