Oil Prices Climb as Key Pipeline Shuts Down for Repair

By Georgi KantchevFeaturesDow Jones Newswires

Global oil prices jumped to their highest level since 2015 as the shutdown of a key European pipeline sapped more crude from a market where supply has already tightened due to production cuts.

Brent crude, the global benchmark, was up 1.5%, at $65.68 a barrel on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.9%, at $58.49 a barrel.

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Late Monday, British refining and chemicals company Ineos said it would shut down the Forties Pipeline System for several weeks after discovering a widening crack. The pipeline system delivers around 40% of U.K.'s North Sea oil and gas production, carrying about 445,000 barrels of crude a day.

"The pipeline outage is the big driver right now," said Tom Pugh, a commodities economist at Capital Economics. "When you take out so much oil out of the market, that inevitably adds to the tightness."

The outage comes as production cuts by the Organization of the Petroleum Exporting Countries and other major producers like Russia takes oil off what has been an oversupplied market. Last month OPEC and its allies agreed to extend their production cuts by nine months to the end of 2018.

Boosted by this deal, which was first agreed late last year, Brent is up 15% in 2018 while WTI is up 9%.

"Even if you do not believe that the extension of the OPEC/non-OPEC deal will boost the global rebalancing process you would have found it impossible to resist of buying oil futures," said Tamas Varga, analyst at PVM brokerage. The "closure of the Forties pipeline system for weeks is one of the most significant unplanned crude oil shortage we have seen this year," he said.

Ineos said that repairs of the Forties Pipeline System could take several weeks after the worsening of an onshore hairline fracture south of Aberdeen, Scotland. A small amount of oil has seeped from the pipeline, the company said, but the leak has been contained.

The rally in oil prices Tuesday also gave a boost to energy shares, with oil and gas stocks in the Stoxx Europe 600 rising 1%.

With some of the Forties crude underpinning the Brent crude benchmark, the global price was rising faster than WTI benchmark. This boosted the spread between Brent and WTI, trading around $7 a barrel, a welcome development for U.S. exporters to Europe.

The run-up in prices, however, could also prove self-defeating, as expensive crude incentivizes U.S. shale producers to ramp up activity. The U.S. oil rig count -- the number of active rigs drilling for oil -- has increased for three weeks in a row.

"The Forties outage gives U.S. producers a chance to get on the market and hedge their output," Mr. Pugh said.

Producers typically take advantage of rising oil by using hedges to lock in the higher prices. According to Citigroup, U.S. suppliers sped up hedging activities for their 2018 production in the third quarter. Over the course of the last quarter the hedge ratio for 2018 production jumped from 12% to 27%, the highest level of hedges since 2014, the bank said.

"High levels of hedge cover of 2018 production could bolster the growth outlook for U.S. shale next year," the bank said in a report.

Among refined products, Nymex reformulated gasoline blendstock -- the benchmark gasoline contract -- was up 1.7%, at $1.76 a gallon. ICE gas oil, a benchmark for diesel fuel, changed hands at $581.75 a metric ton, up 1.6% from the previous settlement

--Neanda Salvaterra contributed to this article

Write to Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

December 12, 2017 08:38 ET (13:38 GMT)