As environmentalists and policy makers continue to clash over TransCanada's (NYSE:TRP) proposed Keystone XL pipeline, the rest of the energy logistics sector is moving forward. Another pipeline deal, one involving an already built and running pipe-way, could herald the United States as an energy superpower, once more. For investors, this deal could be some of best news for the energy sector and offers a multitude of ways to profit.
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Reversing the Flow
Over the last few years, prices for the two major oil benchmarks, Europe's Brent and the U.S.'s West Texas intermediate, diverged and went in opposite directions. At one point, this difference, or the "spread" between the two yardsticks was almost $27 a barrel. One of the main reasons for the spread was the inability to get oil out of Cushing, Oklahoma. Billed as the "pipeline crossroads of the world," Cushing holds about 5 to 10% of the total U.S. crude inventory and is the major hub connecting the Gulf Coast suppliers, with consumers in the North. With the slowing economy and Cushing's landlocked state, a glut of crude began to build up in the region. Firms raced to build new storage facilities and the divergence in the benchmarks began. (Oil and gas investments can provide unmatched deduction potential for accredited investors. For more, see Oil: A Big Investment With Big Tax Breaks.)
However, this all could be changing. Just before the Thanksgiving holiday, ConocoPhillips (NYSE:COP) announced it would be selling $2 billion worth of pipeline assets. While there were some minor pipelines and storage assets in the mix, the real kicker for the U.S. energy markets was the divestiture of its Seaway pipeline to Enbridge (NYSE:ENB). The Seaway pipeline brings crude oil from the Gulf Coast into the Cushing depots. However, along with sale, Enbridge and Enterprise Products Partners (NYSE:EPD), who owns 50% of the pipeline, have agreed to reverse the flow, enabling it move oil from Cushing to refiners in the Gulf.
Pending regulatory approval, the line could bring around 150,000 barrels-per-day to the Gulf refineries, by the second quarter 2012. Patrick D. Daniel, CEO of Enbridge, said of the decision that, "a Seaway reversal will provide capacity to move secure, reliable supply to Texas Gulf Coast refineries, offsetting supplies of imported crude." Analysts estimate that with some pumping modifications, the Seaway's capacity could be raised to around 400,000 barrels-per-day.
Playing The U-Turn
For investors, the shift of the Seaway pipeline from Cushing is monumental. Funds like the iShares Dow Jones US Energy (NYSE:IYE) could be a great way to focus on North America's return to energy dominance. Aside from the ETF and obvious plays in Enbridge and Enterprise, there are other ways to profit from the shift, as well.
The flow reversal will ultimately lower the cost of moving Canadian sour crude and Bakken light sweet crude to U.S. Gulf Coast refineries. Bakken oil producers, such as Continental Resources (CLR) and Denbury (NYSE:DNR), along with heavy oil firms, like Cenovus Energy (NYSE:CVE), should see the value of their assets rise as WTI oil becomes more valuable.
Analysts believe that this move could once again push WTI back into the global spotlight and make it the de facto global benchmark for oil. Brent still trades at roughly a 10% premium to the U.S. benchmark. To that end, futures orientated investors may want to hitch their saddle up to the United States Oil ETF (NYSE:USO), rather than United States Brent Oil (NYSE:BNO), as the spread narrows.
The Bottom Line
Enbridge's recent purchase and reversal of the Seaway pipeline, could be big for WTI oil prices and U.S. energy investors. As the shortage centers in Cushing begin to shed their landlocked status, oil producers in the Bakken, such as Whiting Petroleum (NYSE:WLL), could see their production heading south into the Gulf. The potential is huge and could make the U.S. top dog in energy production, once again. The previous picks are just some of the ways to play the new pipeline reversal. (Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why. For more, see What Determines Oil Prices?)
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Aaron Levit has owned IYE since 2008.