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Oil Prices Surge as Key U.S. Artery Opens


NEW YORK ( TheStreet) -- The much-anticipated break of oil prices above $100 a barrel kicked in Wednesday on news that Enbridge (ENB) and Enterprise Products Partners (EPD) have agreed to open a crucial US oil artery by mid-2012.

The move to reverse the Seaway pipeline by the end of the second quarter of 2012 will allow oil to flow more easily from the country's major storage hub in Cushing, Okla. to Gulf Coast refiners. As a result, prices will more accurately reflect global market price conditions and are soon expected to trade more closely with Louisiana Light Sweet Crude, which has for months been trading at the same or even higher prices than Brent.

WTI oil for December delivery was spiking $2.51 to $101.88 a barrel and the February Brent crude oil contract was down 8 cents at $111.67.

The U.S. dollar, which typically has an inverse relationship with oil, was ticking 0.02% lower at $77.94.

"Brent, has been trading double digits to WTI as a result of the bottleneck," said WeatherBELL Analytics' energy analyst Alan Lammey. "Now that the end is in sight, WTI is collapsing into Brent -- moving higher. It is reflecting tighter global conditions for crude oil."

Previously, major indices announced that they were adding Brent to their portfolio mix instead of WTI in reflection of true economics. But now, they may reverse that decision given that the pipeline reversal will increase the flow of crude from Cushing to the Gulf Coast, says Lammey.

"Up until now, WTI based on Cushing, Okla. has dealt with major constraints. With the reversal decision -- that won't be the case anymore," he said.

"This decision changes everything."

"This is big," says veteran independent oil trader Richard Ilczyszyn. "Anyone who was playing the WTI/Brent spread short is getting out. That's why the spread is narrowing."

"Crude has launched through $100, and the unwinding of the WTI/Brent spread is in full force," commodity analyst Matt Smith of Schneider Electric's Summit Energy agreed.

But even before the big pipeline reversal news today, analysts had already been expecting WTI oil prices to surge beyond $100 Wednesday. Light volumes following the MF Global debacle help lead to exaggerated oil price moves.

The U.S. Commodity Futures Trading Commission WTI crude oil data for the week ended Nov. 8 shows that money managers added 11,820 contracts in new long positions and covered 1,929 lots of prior short sales for a combined purchase of 13,749 contracts. According to Citi Futures Perspective energy analyst Tim Evans, all the buying lifted these crude oil net long positions to 203,965 contracts, the largest net long position since May 31.

"Any time we see funds start to push into the market the shorts get out," said Ilczyszyn. He says if WTI manages to close above $100 today, the price range could extend to $105, with $95 as the support level. Ongoing strong demand from China and bubbling tensions in Iran and Saudi Arabia would also provide support.

Brent prices should trade between $110 and $120 in the near-term, with the pivot point at $115, says Ilczyszyn.

WeatherBELL's Lammey said before the Seaway pipeline reversal news, fund managers were already taking larger long positions, as WTI got very close to closing above the important pivot point area of $99.65 a barrel. Prices closing above this area for two to three consecutive sessions would have seen that next resistance area pegged at $103.10 and $106.25.

"When the market gets into this mode... almost no news out there will prevent it from going where it wants," says Schork Report analyst Stephen Schork.

Crude oil inventories dipped by 1.1 million barrels last week, according to the Department of Energy, compared with the decline of 1.2 million barrels that analysts, on average, were expecting.

Furthermore, U.S. economic data turned out better-than-expected Wednesday. The Federal Reserve said Wednesday that industrial production rose 0.7% in October after dipping 0.1% in September. Economists had expected an increase of 0.4% last month, according to Thomson One Analytics.

Homebuilder sentiment jumped in November, according to a report from the National Association of Home Builders. The NAHB's housing market index came in at a reading of 20 for November, bringing the index to its highest level since May 2010. Economists were expecting the index to remain unchanged from the originally reported reading of 18 in October according to Thomson One Analytics.

Ilczyszyn warns that oil prices could drop just as quickly as they surged today if the equity markets tank. There's been an over 96% correlation between oil prices and equities over the last few months.

Energy stocks were trading mixed. EOG Resources (EOG - Get Report) was falling 0.6% to $101.72; Triangle Petroleum (TPLM - Get Report) was gaining 3.9% to $6.08 ; Chesapeake Energy (CHK - Get Report) was up 0.8% to $25.68; Apache (APA - Get Report) was up 0.8% to $104.25; Anadarko Petroleum (APC - Get Report) was up 0.3% to $80.19; Southern Union (SUG) was down 0.2% to $41.94; and BP (BP - Get Report) was rising 0.6% to $43.96.

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.
Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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