Here's Why Oil Prices Might Rise in 2014

Over the past few years a glut of oil has built up at Cushing, Oklahoma, which has depressed West Texas Intermediate, or WTI, oil prices. Midstream companies saw a major opportunity open up in front of them, and TransCanada  (NYSE: TRP  ) was one of those players who decided to act.

If at first you don't succeed
At first, TransCanada tried to build the massive Keystone XL pipeline, which failed to win regulatory approval. Because the proposed pipeline crossed over the border, TransCanada got caught up in red tape. This pipeline operator doesn't just stop when a roadblock is thrown in its way, however, and it is trying to work around the obstacles.

TransCanada has almost completed its 700,000 barrels per day, or bpd, pipeline from Cushing, Oklahoma, to Port Arthur, Texas. The pipeline will help alleviate Cushing's storage capacity, which has been steadily built up over the years.

To further reduce the glut at Cushing, TransCanada is going to increase the pipeline's capacity to 830,000 bpd once given the chance. The pipeline should start beginning deliveries by mid-January; news of which sent WTI prices up 2.4%.

Not enough room
Cushing, Oklahoma, is a major oil hub and a central part of WTI pricing. WTI pricing is in part based on the amount of crude that lays beneath Cushing. As of November 29, over 40.5 million barrels of crude were being stored in Cushing. That is a sharp increase from the 15.9 million barrels six years ago.

With so much crude being stored at Cushing, WTI has traded at a discount to Brent for several years now. Currently the discount is around $12 per barrel, which is no trivial sum. Refiners have been quick to act, exporting 10.9 million barrels of gasoline in September of this year versus just 2.4 million barrels six years ago.

If American demand for gasoline doesn't jump, then refiners will take the additional crude from Cushing, refine it into gasoline, and export it overseas for a nice profit.

TransCanada's pipeline will be the biggest and newest thing around for a few months. Enterprise Products Partners (NYSE: EPD  ) and Enbridge  (NYSE: ENB  ) plan on one-upping TransCanada with an even bigger construction, however.

Rivalry in the making?
The second pipeline to help take some of the weight off of Cushing's back is the Seaway Crude Pipeline. The Seaway pipeline is 500 miles long and will transport crude from Cushing to Freeport, Texas.

400,000 barrels of crude flow through it each day, but Enterprise Products Partners and Enbridge plan on pushing Seaway's capacity up to 850,000 bpd, which beats out TransCanada's newest creation.

Enterprise Products Partners and Enbridge have guided for the expansion to be completed in the first half of 2014. Combined, TransCanada, Enterprise Products Partners and Enbridge will be pulling an additional 1.15 million bpd out of Cushing and moving it to refiners on the Gulf Coast.

The additional transportation capacity will provide a major tailwind for WTI prices, because it will help end the storage glut at Cushing. Some analysts see the additional capacity pulling more crude out of Cushing than what's going in, which is very important to note.

How it all fits in
If more crude is being taken away from Cushing than is going in, then crude inventories will decrease. A smaller inventory combined with more demand from refiners due to the ability to take in more crude could push up WTI prices.

WTI prices have come down in recent months as Middle East tensions eased up a bit and as the possibility of more production coming out of OPEC increased. With these two pipelines about to expand or come online, WTI may be able to turn around its free-fall.  

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