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Tue 11 Jan 2011 03:52 PM

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Alaska pipe closure may draw Oman oil to US

US refiners' purchase of crude to make up a shortfall in supplies may push Middle East benchmark prices higher,

Alaska pipe closure may draw Oman oil to US
CRUDE PRICES: Dubai crude’s discount to Brent shrank 5.3 percent to $3.59 a barrel on Monday, the biggest drop in a month (Getty Images)

Alaska’s pipeline
closure may force US West Coast refiners to purchase crude supplies from Oman
and Russia to make up a shortfall in supplies, pushing Middle East benchmark
prices higher, Societe Generale said.

The main grades to replace
the lost Alaska North Slope crude oil will probably come from the two areas,
Michael Wittner, a London-based analyst with Societe Generale, said in a report
on Monday.

“If refiners, after
waiting a couple more days, feel that they need to obtain alternative crude
supplies because the restart appears to be slipping, they would have to
increase imports,” Wittner said. “For this to happen, the main market impact
would not be on WTI or even Brent. Instead, Dubai would strengthen relative to
both Brent and WTI, in order to make the arbitrage economically feasible.”

The West Coast is
isolated from the main US and Canadian crude supply sources. The cutoff in
Alaskan North Slope crude will force processors to turn to Russia’s East
Siberian Pipeline and Sokol oil and Oman as they seek similar quality grades
for their plants.

Dubai crude’s
discount to Brent shrank 5.3 percent to $3.59 a barrel on Monday, the biggest
drop in a month. The so-called Brent-Dubai exchange for swaps for January, or
EFS, was at $3.69 a barrel today, according to PVM Oil Associates, a
London-based brokerage. It has averaged $1.64 over the past year.

West Texas
Intermediate crude futures surged 1.4 percent to $89.25 a barrel yesterday
following the leak. Prices have failed to maintain the rally today, slipping as
much as 0.4 percent to $88.93 on the New York Mercantile Exchange.

The West Coast area,
known as Petroleum Administration Defense District, or PADD 5, imported 105,000
barrels a day of Russian oil in October and 96,000 barrels of Oman crude during
October, according to data from the Energy Information Administration. The
region includes California, Washington, Oregon, Alaska, Nevada, Arizona and

The 800-mile
(1,287-kilometer) Trans-Alaska Pipeline system was shut on Jan. 8 after a leak
was found in a pump house. BP and its partners operate the pipeline that runs
from fields on Alaska’s North Slope to the port of Valdez. BP and other
producers ConocoPhillips and Exxon Mobil Corp. suspended 95 percent of their
production after the leak.

Alaska North Slope
crude is a medium-to-heavy type with an American Petroleum Institute gravity of
31 degrees and sulfur content of 1.02 percent, according to data from Energy
Intelligence Group. Oman is a similar grade at 33.34 degrees and with 1.04
percent sulfur.

Russia’s East
Siberian Pipeline Oil, or ESPO, is considered better quality with a sulfur
content of 0.535 percent and an API gravity of 34.7 degrees.

In March, BP
chartered the tanker Iblea to carry ESPO from Kozmino Bay near Vladivostok in
the Russian Far East to the West Coast, according to shipbroker notices.

West Coast refiners
including Tesoro Corp. and Valero Energy Corp. said yesterday they are experiencing
little or no impact after the pipeline closure.

Tankers were being
loaded with reserve supplies at Valdez yesterday, according to Michelle Egan, a
spokeswoman for Alyeska Pipeline Service Co., the operator. Inventories in
Alaska stood at about 2.57 million barrels of crude as of Jan. 9, down from
2.95 million Jan. 7, according to the state’s website.

“At present, exports
have not been halted, but it is hard to make up this supply loss,” JPMorgan
Chase & Co. analysts, led by Lawrence Eagles, said in a research note on
Monday. “West Coast refiners are likely to be looking for alternatives, which
will tend to benefit Oman and Russian ESPO crude.”

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