International and domestic crude oil prices are moving closer

Getting oil to market has finally got a little easier, at least for producers far from the Gulf Coast.

Greater use of domestic crude oil from unconventional plays, increased rail transport and more pipeline infrastructure has helped narrow the gap between international and domestic oil prices to less than $10, the U.S. Energy Information Administration reported Friday.

The spread  had been growing since the beginning of 2011, reaching $23 in  February of this year as pipeline congestion created a glut of U.S. benchmark West Texas Intermediate that sent its price down relative to Brent Crude, the international benchmark. Both are graded as light, sweet crude based on their viscosity and sulfur content.

More recently, the price gap has been in the  $6 to $10 range because of new pipeline capacity at  Cushing, Okla., a key trading hub that has been a choke point for  domestic oil.

“Every time we put in a new pipeline or something happens that loosens the bottlenecks, there are giant price aberrations that get alleviated,” said Amy Myers Jaffe, executive director for Energy and Sustainability at University of California, Davis. “To the extent that the U.S. oil can move around the market more freely, that will make a difference.”

Other pipeline and rail projects added in the past two years have allowed  oil to flow from  North Dakota Bakken Shale and West Texas plays to Gulf Coast refineries, bypassing Cushing altogether.

But while there are several new pipeline projects under construction, the increase in rail transport has been essential in transporting oil produced in previously non-producing regions quickly.

“The difference now is that you having such a volume of new production that the swing transport has become rail,” said Campbell Faulkner, chief data analyst at OTC Global Holdings, an international energy brokerage firm. “It is relatively cheap and it’s fast. That has helped the market be dynamic and has rebalanced it.”

The smaller gap is reminiscent of the way things used to be.

Prior to 2011,  Brent  and West Texas Intermediate prices tracked closely, typically less than $5 apart, with the slightly higher Brent price reflecting costs  to transport it  into the U.S. market, the  Energy Information Administration said in its report.

Some oil pricing experts believe that international and domestic oil prices may decrease in response to falling demand, projecting that U.S. benchmark crude could cost as little as $65 to $75 per barrel by 2016. It closed on Thursday compared at $97.28 on the New York Mercantile Exchange, while Brent closed at $102.90.

Others in the business believe that the West Texas Intermediate  price will continue to inch up.

While pipeline projects that have come online have reduced the gap, continued limitations in storage and infrastructure connecting  new unconventional plays to the Gulf Coast l account for the several dollar spread.

Federal forecasters are predicting, however, that planned maintenance in the North Sea this summer will reduce production of Brent crude, pushing its price up and  potentially widening the Brent-West Texas  spread.

Jaffe agreed, explaining that domestic production will continue to outpace refining capacity.

“We are going to have more and more light oil in the US, and it will be harder and harder to find refineries that will take it,” Jaffe said. “That will push the WTI price down relative to Brent over time. Even if we have this temporary narrowing because of new pipelines coming on, the long term trend is that that gap will widen.”

On Friday, Brent closed at  $102.90 a barrel on the London-based ICE Futures Europe exchange, while West Texas Intermediate was at $97.27 late in the trading day on the New York Mercantile Exchange.

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