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Crude Benchmarks Narrow Gap as Pipeline Expands

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The price gap between the world's two most-important crude-oil benchmarks shrunk to its narrowest in more than three months Monday, as an expanded U.S. oil pipeline looks set to help relieve a domestic oil-supply glut.

The difference between U.S.-traded West Texas Intermediate crude oil and Europe's Brent crude stood at $18.21 Monday, the narrowest since September.

The price spread has shrunk by 6.4% since the beginning of this year, due in large part to the announcement by pipeline operators Enterprise Products Partners LP and Enbridge Inc. (ENB) that 400,000 barrels a day of oil will begin to flow through their Seaway Pipeline by the end of this week.

The pipeline, which initially transported 150,000 barrels a day and was reversed earlier this year, transports oil from the oil-transit hub of Cushing, Oklahoma, to Gulf Coast refineries. Investors are betting that the pipeline will help lower record oil stockpiles in Cushing and raise the price of U.S. crude against its European counterpart.

"That's the move that's been going on...WTI has been gaining ground on Brent," said Peter Donovan, vice president and oil trader at Vantage Trading in New York. "It's the anticipation of increased volumes down the Seaway Pipeline."

Light, sweet crude for February delivery settled 10 cents, or 0.1%, higher at $93.19 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange rose 9 cents to settle at $111.40 a barrel.

Historically, the two benchmark oil contracts have traded within a few dollars of each other. But since 2010, surging production in North Dakota and other landlocked regions has been stuck in the middle of the U.S., upending the status quo.

Last week, the U.S. Energy Department said Cushing inventories rose to 49.8 million barrels, an all-time high. Pipeline companies are working to relieve the glut, but haven't kept pace with rising output.

WTI, which trades on the New York Mercantile Exchange, last settled higher than Brent in August 2010. Since then, the spread has expanded and contracted as investors have tried to gauge when pipelines will re-connect the two oil markets.

Some traders expect that Seaway's expansion, along with other pipeline projects planned for the next two years, will continue to narrow the gap.

"The spread's on a path to narrow into 2013," said Rich Ilczyszyn, head of Chicago futures-trading firm iiTrader in Chicago, adding that the re-opening of Seaway could reduce the spread by another $1 or $2 by the end of the week. "This is the trade right now."

Front-month February reformulated gasoline blendstock, or RBOB, settled 1.31 cents, or 0.5%, higher at $2.7774 a gallon. February heating oil settled 0.5% higher at $3.0321 a gallon.

Copyright (c) 2012 Dow Jones & Company, Inc.

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