Goldman Sachs Recommends Buying WTI Oil on Seaway Reversal
Friday, 24 February 2012 | 11:00
Goldman Sachs Group Inc. recommended buying September crude futures in New York on speculation the reversal of the Seaway pipeline in June will tighten supplies at Cushing, Oklahoma, where contracts are delivered.
Investors should take a “long position” on West Texas Intermediate oil as the U.S. benchmark grade will rise and the discount to London-traded Brent will narrow, the bank said in a report e-mailed today. It also advised investors to stop buying July Brent contracts to lock in gains. The Seaway pipeline, owned by Enterprise Products Partners LP and Enbridge Inc., will carry crude from Cushing to refiners on the U.S. Gulf Coast.
“The better trading opportunity may currently lie in WTI futures for the contract months following the scheduled June reversal of the Seaway pipeline,” David Greely, head of energy research at Goldman in New York, said in the report. “With Brent prices having crossed our three-month price target it is an opportune time to reassess our trading recommendation.”
Oil climbed to a nine-month high this week on speculation a European Union bailout of Greece will bolster fuel demand and as Iran halted some exports to the region. Brent, trading at about $123 a barrel today, may rise to $127.50 in the next 12 months, Goldman predicted. West Texas traded at $105.91 for April delivery and $107.09 for September.
Enterprise Products and Enbridge have started draining about 2.3 million barrels of oil from the Seaway pipeline into tanks at Cushing as they prepare to switch the line’s flow. The reversed line will have a capacity of 150,000 barrels a day, the companies said Nov. 16. Pump modifications to be completed by early 2013 will boost capacity to 400,000 barrels.
“We expect that the overall oil market will continue to tighten in 2012, pushing oil prices substantially higher to restrain demand,” according to Greely.
Goldman said its call to buy Brent crude, first recommended on May 23 last year, has made a profit of $13.19 a barrel. Investors should stop buying as the European benchmark crude’s premium to West Texas begins to narrow, it said.
Brent oil for September settlement traded today $11.61 a barrel higher than West Texas for the same month. The difference will drop to about $5 within six months, reflecting “pipeline tariff economics,” the bank said.
Goldman also recommended investors sell the spread between May and June West Texas contracts because stockpiles at Cushing may “rise sharply in the coming months.”
Supplies at the storage hub rose in the four weeks ended Feb. 10 to 32.48 million barrels, according to the U.S. Energy Department. That’s the highest since September.
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