WTI reaches highest price in 16 months

New pipelines, soaring demand from refineries and turmoil in the Middle East have driven up crude oil prices over the past few weeks, pushing up gasoline prices as well.

Prices for West Texas Intermediate rose above $108 this week for the first time in 16 months.

The U.S. benchmark crude rose 1 cent to close at $108.05 a barrel on the New York Mercantile Exchange Friday, up $2.10 a barrel for the week.

That’s good news for oil producers in the country’s unconventional shale plays, who often were receiving far below the market price for West Texas Intermediate, said Michelle Michot Foss, chief energy economist for the Bureau of Economic Geology at the University of Texas at Austin.

“From a producer side, this is completely welcome thing,” she said. “This is going to help people recoup some losses on projects. We were starting to get a little worried about sustainablility if producers didn’t get better prices.”

Brent crude, the international benchmark, and West Texas Intermediate both are graded as light, sweet crude and traded at similar prices until 2011, when Brent prices began to outpace those for the domestic crude.

The gap was caused at least in part by increased U.S. shale production, combined with the lack of pipelines and other transportation options and limited storage capacity at Cushing, Okla., the physical delivery point for West Texas Intermediate specified in futures contracts for the U.S. benchmark.

That sparked a midstream renaissance, a flurry of pipeline and crude-by-rail activity.

John White, an analyst with Triple Double Advisors in Houston, said the opening or expansion of several pipelines, including the reversal and expansion of the Seaway Crude Oil Pipeline from Cushing to the Texas coast, have reduced the supply of crude oil at Cushing.

Expansion of BP’s Whiting Refinery in northwest Indiana also increased demand for crude from Cushing, he said.

Both combined to drive up prices for West Texas Intermediate.

Joseph A. Stanislaw, an independent senior advisor to Deloitte, said the spike in demand is likely to be temporary.

But the spike in gasoline prices is real.

The average price of a gallon of regular gasoline was $3.53 in Houston Friday, up from $3.37 a week ago. The average price nationally was $3.67, up from $3.55 a week ago.

“This is not a great time to have a surge in gasoline prices,” Foss said. “It could impact consumer purchases, but it would have to be a prolonged event, and I don’t think it’s going to be.”
White agreed.

If gasoline prices drop by this fall, there will probably be only a minimal impact on the U.S. economy, he said.

“This rise in West Texas Intermediate oil prices has put pressure on refining margins on the short term,” he said. “But the market should adjust in a relatively short period of time.”

How long the run-up in oil prices will last remains to be seen. They have increased 15 percent since June 21.

“It’s an up and down movement,” Stanislaw said. And while the specific narrowing of the gap between West Texas Intermediate and Brent is linked to domestic transportation issues, prices for both benchmarks are also up because of geopolitical tensions.

“When they get intense, the price goes up,” Stanislaw said. “When they ebb, the price falls. I think right now, as long as that critical anxiety lasts around Egypt, Syria, it’s going to be up. That’s a different issue from the Brent-WTI spread.”

The next issue, Foss suggested, will be how growing U.S. production affects the global market.
The United States already is importing less oil from Mexico, Venezuela and other countries, pushing that oil onto the global market, she said.

“It’s taken a lot of discipline that Brent hasn’t skyrocketed to $130 or $140,” she said.

Brent closed Friday at $108.07.

Foss said the U.S. market is imposing that discipline. “Our market is going to have a greater effect at moderating international prices, but it also will depend on the risks people perceive and global demand,” she said.