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Surging US oil production strains distribution system

Pipe is stacked at the southern site of the Keystone XL pipeline on March 22, 2012 in Cushing, Oklahoma
Pipe is stacked at the southern site of the Keystone XL pipeline on March 22, 2012 in Cushing, Oklahoma. Surging oil production has put the United States on track toward greater energy independence, pushing US reserves to their highest levels in 30 years.

Surging oil production has put the United States on track toward greater energy independence, pushing US reserves to their highest levels in 30 years.

But analysts say bottlenecks in the distribution system are keeping oil from reaching markets.

US oil stocks reached 395.3 million barrels last week, a level not seen since US authorities began publishing weekly figures in 1982. The Energy Department's monthly figures show it to be the highest since April 1981.

The accumulation of oil is linked in part to cyclical seasonal factors, with refineries cutting back consumption this time of year as they prepare for production of gasoline to meet rising demand in summer.

But the rise in oil reserves has also occurred in tandem with an oil boom that has been underway in the United States since 2008, propelled by new technologies.

With the emergence of hydraulic fracturing and horizontal drilling to extract oil and gas from new sources, US oil production has increased from five million barrels a day to 6.5 million barrels in 2012, and the US Energy Information Administration anticipates production will hit 8.2 million barrels a day in 2014.

But David Bouckhout, an analyst with TD Securities, says "there is a little bit of a disconnect with the infrastructure."

"We are still waiting on pipeline capacity to be built out of the areas where this production growth is coming from (so it) can actually be accessible for refiners to use it," he said. "But it takes some time."

Pipelines that once moved imported oil from the Gulf of Mexico to refineries in the central United States are now being reversed to carry oil from production areas in Texas and Oklahoma to the gulf.

The Seaway pipeline, for instance, is now transporting 400,000 barrels of oil a day to gulf refineries from Cushing, Oklahoma, where the benchmark West Texas Intermediate crude quoted in New York is stored.

When it is fully online in the first quarter of 2014, it will move 850,000 barrels a day.

The flow is also being reversed on the Magellan Longhorn pipeline, which this year began transporting oil from west Texas, where the shale oil boom is in full swing, to the gulf refineries. It is expected to reach peak capacity in the third quarter.

Sunoco Logistics also has a number of projects that will drain oil from the Permian Basin, a huge oil and gas producing area in west Texas, toward the gulf, said independent oil analyst Andy Lipow.

And the oil markets haven't given up hope that President Barack Obama will authorize an extension of the controversial Keystone XL pipeline, which if completed would ship oil from Canada's tar sands to the Gulf of Mexico.

Pipelines account for about 90 percent of the oil products shunted around the United States, but companies also are turning to rail as an alternative, particularly in areas where the infrastructure has not caught up, like North Dakota, a big producer of shale gas.

In just the past year, transport of oil products by rail has shot up 50 percent.

As the US distribution system adapts over time, analysts say US dependence on foreign oil will decline.

"At some point we are likely to see less import coming to the US because domestic supply will be able to fill out," said Bouckhout.

The latest EIA report shows a 15 percent drop in US oil imports in February from a year earlier, falling to 9.2 million barrels a day, their lowest level since March 1996.

But the United States cannot totally stop importing oil, if only because it has long-term supply contracts with oil producing countries, said Robert Yawger, an analyst with Mizuho Securities USA.

Moreover, he said, "there is always going to be a scenario where for certain blends, the price of Saudi crude oil, very easy to extract, plus transportation, will still be cheaper than a price of a barrel of tar sands from Alberta or shale oil from the US."

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