There has been a lot of talk lately regarding the politics over the Keystone XL pipeline. Where there isn’t any debate is in the high level of oil prices. Oil prices continue to remain very high, but there is a big difference based on where the oil is coming from. The oil from Alberta and North Dakota is much cheaper than the international standard, which is Brent Crude. On the futures market, oil prices of West Texas Intermediate (WTI) are at almost a $20.00 discount to Brent oil. This is due to the fact that the oil in the middle of North America is stuck; it can’t get to the market.
This obviously sounds like an investment opportunity for someone. Whenever oil prices are high, a door is opened on an investment opportunity. The Keystone XL pipeline is proposed to be built by Trans Canada Corporation (NYSE/TRP). However politics are putting a hold on this pipeline in spite of high oil prices due to worries over environmental issues. Recently, there is news of another pipeline propose to be built by Enbridge Inc. (NYSE/ENB) and Enterprise Products Partners L.P. (NYSE/EPD).
Enbridge and Enterprise currently run the Seaway pipeline, which operates from Texas into Cushing, Oklahoma. Because of the huge spread in oil prices, the firms see a big investment opportunity in turning the flow of oil around and sending it from Cushing to Texas. This reversal will move 150,000 barrels per day from the middle of the country where it’s landlocked, to the refineries in Texas by the summer. The firms expect that they can add capacity for a total of 400,000 barrels of oil per day being moved south by next year.
Enbridge currently transports over 60% of oil from the Western part of Canada, with 13% being foreign imports. The firm is now expanding its Flanagan pipeline hub to Cushing, allowing an additional 585,000 barrels per day to be transported. In addition, the firms are looking at expanding their Seaway pipeline with a 30-inch pipe that will add 450,000 barrels per day within two years.
Enbridge and Enterprise don’t face the same level of scrutiny as the Keystone XL pipeline, as many portions of the pipeline already exist. While there are some environmental standards that need to be reviewed, it is very likely that they firms will get clearance for the new capacity to come online.
The Canadian Association of Petroleum Producers expects oil sand production to double by 2020. These high oil prices are here to stay and additional capacity to move the products to where it is needed are a must for the long-term gains of America. This is clearly an investment opportunity, especially when we consider oil prices over the next decade. Demand is not going down worldwide, but is continuing to increase. There is also a relatively limited supply. These are the most basic reasons for oil prices to remain elevated and for firms to take this investment opportunity and make a solid long-term plan.
Investors have noticed that both Enbridge and Enterprise see this investment opportunity in high oil prices and have driven the shares higher since last year. This doesn’t mean you should ignore them completely, but I would look at opportunistic pullbacks to strategically buy shares when they become a good value play. Like any investment, the fundamentals can always shift and change, but I would keep my eye on oil prices and look for a good, long-term investment opportunity to profit from.