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Crude-Oil Futures End Higher; Brent Spread to US Benchmark at 1-Month High

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Crude-oil futures prices rose Friday amid continued hefty gains in U.S. equities price. Global benchmark Brent crude oil hit a 20-week high while worries over logistical problems at a key pipeline capped the rise in U.S. prices.

Brent's premium to the U.S. benchmark price on the New York Mercantile Exchange blew out by $1 a barrel, to $19.06 a barrel, the most since Jan. 3, after operators of the Seaway Pipeline said the key conduit may not be free from potential operational restraints until work on a new section of pipeline is completed near the start of the fourth quarter.

Seaway, the pipeline outlet for growing crude oil supplies from the Midwest to the key Gulf Coast refining hub, last month more than doubled operational capacity to 400,000 barrels a day last month. Anticipation that the higher flows to the Gulf from Cushing, Okla.--the delivery point of the Nymex contract--had driven U.S. crude prices higher, on the notion they would gain market share at the expense of costlier imports, priced against the value of internationally traded Brent.

While the spread did narrow briefly in January to its weakest level since July, at under $16 a barrel, news last week that operating problems cut the flow on the line to just 175,000 barrels a day, pushed it back out, with Brent galloping higher, at the expense of the U.S. benchmark.

U.S. crude also is held back by widespread seasonal refinery maintenance that is reducing near-term demand. Crude's modest support, analysts said, comes from carryover strength in petroleum products, which are climbing to their highest levels since early in the fourth quarter on anticipation that lower refinery output will tighten product inventories.

Seaway is "not doing what the market thought it would do originally," said Gene McGillian, analyst and broker at Tradition Energy, referring to the widening of the price spread between the benchmarks. Goldman Sachs said on Jan. 22, before the operational snag at Seaway, that it expected Brent's premium to the U.S. benchmark to erode steadily to $6 a barrel by the end of 2013.

Traders said Brent, which is exported globally, also is reflecting increased market tensions over recent unrest in Algeria and the Middle East.

Nymex light, sweet crude oil for March delivery settled 26 cents higher, at $97.77 a barrel, after trading in a range of $96.51 to $98.15 a barrel.

ICE March North Sea Brent settled 1.1%, or $1.21 a barrel, higher at $116.76 a barrel, the most since Sept. 13.

U.S. crude gained 2%, or $1.89 a barrel in the latest week, while Brent jumped 3.1%, or $3.48 a barrel.

Traders said the evolving issue regarding Seaway will be a major focus of the market in coming days, but there is concern that prices have become overvalued.

Matt Smith, commodity analyst at Schneider Electric in Louisville, Ky., said "the underlying fundamentals don't justify" U.S. crude oil futures approaching $100 a barrel.

"It was only a few weeks ago we were worried about OECD oil demand being weak," he said, referring to the major industrialized nations that comprise the Organization for Economic Cooperation and Development. "Now, we're swept up in the euphoria over equities."

Mr. McGillian at Tradition Energy said the "bulls still in charge, but we're reaching the point where we need to see new signs of strong demand" to justify gains.

Rising heating oil and gasoline prices also gained support from higher Brent prices, as their values are tied to the crude oil that is widely used by refiners on the Gulf Coast and the East Coast.

Front-month reformulated gasoline prices climbed in 11 of the past 12 sessions and in seven of the past eight weeks. March gasoline settled at $3.0536 a gallon, up 2.19 cents on the day and the highest level since Sept. 28.

March heating oil settled 4.19 cents higher, at $3.1606 a gallon, the highest price since Oct. 18.

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

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