Monday, January 28, 2013

Clearbrook Crude

One of the things that we hear a lot when discussing oil and gas prices is that oil is a global market and therefore subject to fluctuations in supply and demand that may occur anywhere in the world. While that is still true compared with other commodities like natural gas whose prices are based on regional supply and demand, the fact is the there isn’t a truly a single global price for oil and there is more variation in oil prices today than at any time in recent memory. The Key to Oil: Location, Location, Location:

The average spot price for Brent crude oil in 2012 was about $112 a barrel. Meanwhile, West Texas Intermediate averaged only $94, a 16% discount. But that is nothing compared with some lesser-known benchmarks. Oil priced at Clearbrook, Minn., mainly barrels produced in the prolific Bakken basin, got just $88, a 22% gap. Western Canadian Select crude, meanwhile, sold for an average of about $74 a barrel, a one-third discount to Brent. Today, those Canadian barrels command less than $65 a barrel against Brent's $113.

Raise your hand if you knew there was a oil price benchmark that was determined at Clearbrook, MN. In fact, raise your hand if you hand if you had even heard of Clearbrook, MN before. I had no idea that the town of 518 souls in northwestern Minnesota was home to an oil pipeline junction and had its own oil benchmark. Next time you hear someone talking about Brent or West Texas oil prices, throw in a reference to Clearbrook to really establish your cred.

The reason for the spread in prices is the difficulties involved in getting the oil from Bakken and the Canadian oil sands to market. Since it costs more to get the oil to refineries and eventually consumers, the producers have to offer a discount on their product. That looks likely to change in the not too distant future.

But even they may now spell opportunity. While the future of the Keystone XL pipeline, a major potential route south, remains questionable, help is coming from other quarters. One is BP's Whiting refinery near Chicago, which is being retooled to absorb more heavy Canadian oil in the second half of 2013. And as new pipelines and rail links narrow the gap between WTI and Brent, that should also pull up the price of Canadian oil.

Above all, cheap oil attracts buyers and logistics firms. The big discounts on Bakken crude led railroads to add almost one million barrels a day of transportation capacity last year, according to investment bank Tudor, Pickering, Holt. It estimates a combination of pipelines, rail trucks and barges could close the discounts on Canadian crude by $20 a barrel or more in the next couple of years. That could boost profits substantially. Every $10 a barrel extra that Baytex gets on its heavy crude oil would boost 2013 cash flow per share by 16%, according to RBC Capital Markets.

For energy investors seeking profits, it might be time to buy a map.

And put a pin on Clearbrook. Speaking of logistics, remember a few years ago when Warren Buffett went heavy into railroads and people wondered why he was investing in transportation technology from the past? There’s a reason that he’s called the “Oracle of Omaha.”


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