LONDON -Crude oil futures surged more than $4 a barrel in London trade Thursday after an explosion and fire on a major oil pipeline blocked U.S. imports of Canadian crude.
Crude prices soared following confirmation that Enbridge Inc. (ENB) has closed all of its four-pipeline system - the main crude oil artery between Canada and the U.S. - after an explosion and fire on one line Wednesday. Two workers were killed in the explosion, Enbridge confirmed.
Uncertainty over the extent of damage to the pipeline - capable of transporting up to 1.5 million barrels of oil a day - and when the line could be restored fanned market fears.
"This pipeline is carrying nearly 20% of U.S. imports, that is really quite significant," said Commerzbank analyst Eugen Weinberg.
"I would expect spot prices to go higher from this level because it is not clear when this pipeline will get back into production again."
At 1250 GMT, the front-month January Brent contract on London's ICE futures exchange was up $1.95 at $91.76 a barrel.
The front-month January light, sweet, crude contract on the New York Mercantile Exchange was trading $2.74 higher at $93.36 a barrel.
The ICE's gasoil contract for December delivery was up $5 at $826.50 a metric ton and Nymex gasoline for December delivery was up 476 points at 232.33 cents a gallon.
Wednesday's explosion occurred at 1545 local time approximately three miles southeast of Enbridge's Clearbrook, Minnesota terminal in Line 3, a pipeline which was closed for maintenance before the incident, spokesman Larry Springer told Dow Jones Newswires.
He said nearby pipelines were also closed as a precautionary measure.
But until a fire - burning as a result of the explosion - is extinguished the company will be unable to estimate when the pipelines will be reopened, he added.
Price reaction to the pipeline outage was most pronounced on the Nymex contract.
The pipeline feeds major refineries in the U.S. Midwest and a prolonged outage would force refiners to secure supplies from elsewhere, most likely West Texas Intermediate (WTI) stocks held at Cushing, Okl., the delivery point for Nymex crude oil futures, analysts said.
"Recently those Midwest refineries have been using Canadian crude," said Jim Rintoul of TheOilTrader.com. "If there is no crude coming down from Canada then (they) have to buy WTI. The most efficient way of doing it is to buy the futures."
"Midwest refiners are the key thing (to price moves) - they don't have an alternative."
The outage has occurred at a crucial time, with refineries returning from seasonal maintenance and markets uneasy about winter supply levels.
"It will cause serious disruptions to Petroleum Administration Defense District 2 (the Midwest) as it is occurring at the time that some refinery capacity is coming back on line in the region," said Olivier Jakob, head of Petromatrix oil consultancy in Switzerland.
The International Energy Agency said it was monitoring the Enbridge incident Thursday and would consider using emergency stocks if necessary. Qatari oil minister Abdullah bin Hamad Al Attiyah said that OPEC could discuss the shutdown if it remained an issue when the group meets in Abu Dhabi on Dec.5.
Thursday's rapid gains eclipsed the $3.80 fall in Nymex crude that followed latest weekly inventory data from the U.S. Department of Energy Wednesday.
The mildly bearish DOE data scotched any speculative hopes of a price boost, encouraging investors to take profits, and leading to a price move that many deemed excessive.
Crude oil stocks fell by 400,000 barrels, less than expected, according to the data, while gasoline stockpiles grew more than expected. Distillates, which include heating oil and diesel fuel, fell less than forecast.
"Some people just took their chips off the table yesterday," Weinberg said. "They thought 'we're not going to get $100 just yet' and we had news from OPEC on a possible 500,000 barrel-a-day increase."
While analysts had been predicting a correction Thursday to Wednesday's losses, the fallout from the Enbridge explosion exceeded expectations and brought fresh speculative buying back into crude, reinvigorating talk of $100-a-barrel oil.
"This sounds like it could be a really serious problem for the U.S.," a London-based trader said. "It's not the ideal time to be losing 1.5 million barrels a day."
Whilst overshadowed by the pipeline explosion, crude oil prices were also taking support Thursday from gathering expectations of a further U.S. Federal Reserve rate cut.
Comments from Federal Reserve Vice Chairman Donald Kohn Wednesday were interpreted as hinting at another reduction in lending rates.
Amid fears of slowing economic growth, and therefore potential reduced demand for crude, the news was viewed Thursday as price positive by crude traders.