UPDATE 2-Oil moving by barge as Midwest discount deepens

Tue Jun 14, 2011 5:23pm EDT

Related Topics

* Cushing crude to move via barge to US Gulf Coast

* Petro Source hopes to ship 150,000 bbls/month (Rewrites, adds details)

By Janet McGurty

NEW YORK, June 14 (Reuters) - The glut of crude trapped in the middle of the United States is set to ease by just a little bit in the coming weeks as several big barge operators make headway in shipping landlocked oil to the Gulf Coast.

After nearly six months of an unprecedented gap between cheap Canadian and U.S. mid-continent crude versus coastal rivals, several new efforts to break the logistical bottleneck that prevents that crude from being shipped south by pipeline are coming to fruition, operators say.

Privately held Petro Source LLC is set within weeks to begin shipping about 150,000 barrels a month -- or about 5,000 bpd -- from the Port of Catoosa in Oklahoma down to the Saint James, Louisiana, area.

And Kirby Corp (KEX.N), the nation's largest inland tank barge operator, said it had begun moving crude by barge from the U.S. Midwest region to the Gulf Coast for the first time. [ID:nWEN4321]

The shipments are the latest evidence that traders are still finding new ways to break through the bottleneck that is holding back the rising supply of Canadian oil sands and U.S. shale oil crude, which has driven the U.S. benchmark futures contract to a record discount versus Brent.

Although the volumes so far are a drop in the bucket compared with the near record 40 million barrels stuck at Cushing alone, the move illustrates the desire of refiners and traders to take advantage of the favorable economics between crudes.

WITHIN WEEKS

Shipping costs for Petro Source are about $5 to $7 a barrel, depending on the cost of diesel for the barges, said Rex Gilbreath, a partner at the firm. He said they would begin loading barges in two to three weeks, Gilbreath said.

"We are waiting for Coast Guard approval to barge," said Gilbreath. He said they are in the process of putting in the security measures such as security cameras and fences needed to ship oil. The Coast Guard confirmed that the approval was underway.

Barges have been used intermittently through the years to move crude but the current dearth of barges and trucks as well.

Tanker trucks are used to carry crude from Cushing to barges and trains but drivers who meet the stringent Homeland Security driving requirements for oil are in short supply, curtailing the amount that can be trucked, Gilbreath said.

"We are moving crude from the Midwest to the lower Mississippi areas," company spokesman Steve Holcomb told Reuters. "We haven't done this in the past ever,"

He gave no details on the volume or frequency of the shipments, but an analyst who follows the firm said there was no fixed contract in place and expected about two shipments of crude to leave for the Gulf Coast.

Kirby has said in the past that it had intermittently carried crude south on the Mississippi, but that it would want dedicated commitments from suppliers before utilizing many of its roughly 150 "black oil" barges to the trade.

Normally barges carry crude upriver from the Gulf Coast to refiners far into northern reaches of the Mississippi . But the unprecedented widening of the Brent/WTI spread is threatening to reverse that flow.

PERSISTENT DISCOUNT

While the U.S. market normally trades at a premium to Brent, so far this year it has averaged a discount of $12 a barrel, providing a sizable profit incentive for moving inland crude to import-dependent coastal refiners.

The spread CL-LCO1=R has ballooned out this week to a record of more than $22 a barrel, although that has not opened a wider arbitrage as Gulf Coast crudes have failed to keep pace with the strength in Brent, fueled by supply strains in Libya, Nigeria and the North Sea. Premiere U.S. Gulf crude Light Louisiana Sweet over the last week slumped to a rare discount versus North Sea's Brent.

Other companies have also been taking to the rivers.

Tanker and barge shipments of crude from PADD II -- the Mid-west region -- to the Gulf Coast PADD III states topping 1 million barrels in March, the highest since the Energy Information Administration's data began in 1986 and triple last year's average.

Individual companies such as Marathon Oil Corp (MRO.N) have been using barges to ferry Canadian crude from Patoka and Wood River, Illinois, down to its 436,000-bpd state-of-the art refinery in Garyville, Louisiana.

Alon Energy Corp (ALJ.N) also moved about 8,000 barrels per day of Bakken Shale out of the Midwest via train to its 80,000-bpd refinery in Krotz Springs, Louisiana.

TransCanada Corp's (TRP.TO) plan to build the 500,000 barrel-per-day, $7 billion Keystone XL pipeline to alleviate the Midwest glut has been under regulatory review since 2008. [ID:nN08269219]

(Additional reporting by Antonita Devotta and David Sheppard)

(Reporting by Janet McGurty; Editing by Lisa Shumaker)

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