Crude price rallies on pipeline expectations

Crude surged following news that a major part of the Keystone pipeline expansion is expected to be finished this month.

Crude oil futures for November had risen 1.9% to around $104 per barrel by late in the New York pit-traded session. The bounce in the price was fuelled by TransCanada Corp saying that it expects to conclude work soon on the southern section of its Keystone pipeline expansion in late-October.

The pipeline, which will transport 700,000 barrels of oil per day away from the US oil hub at Cushing, Oklahoma to refineries in the US Gulf Coast, is divided into three sections. The central section is already finished, and completion of the southern section would therefore leave only the northern parts in Cushing to be completed.

Once finished, the pipeline would increase the pace at which crude stockpiles are being drawn down at Cushing, the price settlement point for US crude oil futures on the CME.

Cushing has suffered from insufficient pipeline capacity for many years that has seen a glut of oil at the delivery point constraining the price of US crude. Capacity has been improving recently, though, and that has seen stockpiles decline by 17 million barrels at Cushing over the last 13 weeks. This decrease in supply pressure should be augmented by the Keystone pipeline.

Inventories for the US as a whole expanded sharply last week, rising 5.47 million barrels according to data published by the Energy Information Administration today, but stockpiles at Cushing continued to decline, dropping 59,000 barrels. Overall fuel consumption fell 3% and refineries ran at 89% of capacity, the lowest rate since early June.

The Keystone pipeline news has given US light crude a boost today, but the long-term significance of the government shutdown for the oil market as a whole is yet to be determined.

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