About five weeks ago Bakken crude oil prices nose-dived almost $25/Bbl in a few days. In a posting titled A Perfect Storm in the Bakken we looked at the geography of flows through Clearbrook and Guernsey, the behavior of regional prices and the causes of the price crash. The graph below shows the prices at these two hubs versus WTI at Cushing with the period in question indicated by the blue dashed line.
We laid out five factors that drove the price down:
(1) Warm weather across the Williston allowed uninterrupted operation for virtually the entire winter –unusual that part of the world, and the result was an incremental 20 Mb/d of production coming on each month; (2) Canadian production increased too; Enbridge pipeline inventories in Canada have been unusually high; Pipeline capacity is full; (3) Demand has been slack due to the weak economy, shoulder-month dynamics and several refinery turnarounds; (4) Many new rail alternatives for Bakken crude are still under construction; (5) Then the straw that broke the camel's’ back - BP had an unplanned shut-down of its 100 mb/d FCC unit at Whiting, Indiana, creating a surplus of crude oil in the market. That put a big refinery buyer in the market as a seller. It was the perfect storm. And the price got crushed.
Two things to note about the market up to March 1st. First, prices recovered but not back to the $5.00 differential seen before the crash. And second, as of that date Clearbrook and Guernsey were trading in tandem at almost exactly the same number each day.
As the market moved into March (right of the blue shaded area in the graph), things began to deteriorate again. More refinery turnarounds kicked in, both in the Midwest and at Billings, MT where both ExxonMobil and ConocoPhillips took units down. Then prices at the two hubs diverged with Clearbrook dropping almost $5.00 below Guernsey in Mid-March. Turnarounds continued in the Midwest keeping the pressure on Clearbrook, while Guernsey benefited from a rush to fill storage at Cushing prior to the Seaway reversal. During March, both Bakken prices recovered, but the differential continues at the $1.50-$2.00 level into April.
This rollercoaster will continue for some time to come. More than 450 Mb/d of new pipeline capacity is being added by Enbridge, Plains, True (Butte) and others. Still more outbound capacity is coming with eight to ten new rail terminals, which could move another 600 Mb/d out of the region. But it will take time to put all of this capacity in place. And each month another +20-30 Mb/d of Bakken crude oil hits the market.
And one final point. We are measuring this differential against WTI. Not only does WTI get bounced around by big storage plays in Cushing, it is the left-hand side of the most popular speculative trade on the block – the Brent vs. WTI spread. No matter what happens to the fundamentals, this spread will always overreact due to the significant speculative interest in that differential.
So prices will continue Rockin the Bakken. You knew I had to get that one in at some point, right?