Another hit to U.S. oil supplies

Oil refinery

TEXT OF INTERVIEW

KAI RYSSDAL: Of all the things the oil markets need, a nudge toward more volatility is most definitely not one of them. But that's exactly what happened with that pipeline explosion yesterday. Two workers were killed, and a key route for Canadian crude into the Midwest was crippled. Marketplace's Bob Moon is here to put the pieces together for us. Hi Bob.

BOB MOON: Hello Kai.

RYSSDAL: How close was this to being really, really bad?

MOON: Well a lot of the experts that I spoke to today said we really dodged a bullet. You know it's significant when you're reading the news wires and experts as far away as Europe and Australia are weighing in on something that's going on in Minnesota. And the Bush Administration is saying that it's ready to tap into the country's strategic petroleum reserve to help offset any loss of oil.

RYSSDAL: Yeah. Minnesota's not really the first place you think of when you think about oil coming into this country.

MOON: That's right. There is an oil pipeline that flows from Canada into the Midwest, through Minnesota, and it accounts for roughly 15 percent of our imports, and the problem is that there's just about no slack for the few Midwest refineries that depend entirely on the oil that they get by pipeline. This also happens to be a time that refiners start to ramp up their production of winter grade gasoline and heating oil and it apparently doesn't matter how soon they can get this oil flowing again We spoke to John Kilduff. He's an oil analyst at M.F. Global.

JOHN KILDUFF: Because there is going to be some crude interruptions, obviously, some of the refiners are likely to have to throttle back production for at least a couple of weeks until the system catches up and replenishes from the outage that we've had here today.

RYSSDAL: Connect the dots for me though because last I checked oil prices are actually down.

MOON: That's right. Well there's going to be an immediate effect on pump prices, yes, but the oil speculators seem to have decided that there's no long-term effect here. You know, if you want to know what's going on with oil prices, one of the places that the speculators watch is an out of the way place in Oklahoma. It's called Cushing. Where these traders buy their contracts for crude in New York, the oil gets delivered by pipeline to a big farm of oil storage tanks out there on the plains of Oklahoma. And early this year those tanks were almost full and that helped keep the price of oil down. Well, one of the reasons the prices climbed over the summer was that those oil reserves in Cushing were being depleted. The storage tanks were way, way down

RYSSDAL: Yeah, but talk to me about actual consumer demand though. I don't seem to recall a spike in that. I mean, it's been rising, but . . .

MOON: Well when the price started rising, the speculators decided it was time to cash in. Here's what I was told today by one oil trader Stephen Schork.

STEPHEN SCHORK: This is more of a financial play of traders again looking at the forward curve, and it just simply doesn't make any sense to hold onto your inventory. So the inventory is essentially out there. So it's not being sopped up by demand per say, but it's essentially being sopped up by an arbitrage opportunity to realize the quicker gains in the spot market.

MOON: Well guess what? Earlier this week there was word the tanks around Cushing, Oklahoma had been filling up again. Ever so slightly, but oil analyst James Ritterbusch told me that that's been enough to start pushing prices down.

JIM RITTERBUSCH: What's more important to the market is the dynamic that Cushing stocks appear to have bottomed and they look to be in the initial stages of an upward trend. So that's what the market's going to be looking at.

MOON: Here's the thing though Kai, oil from that crippled Canadian pipeline helps fill those tanks in Cushing, and so we're going to have to watch closely to make sure they keep on filling up and they don't get drawn down by these refineries that need the oil.

RYSSDAL: Oil goes up. It goes down. We get Bob Moon to tell us why. Thank you Bob.

MOON: Thanks Kai.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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