April 6, 2018
U.S. oil production has reached an all-time high with the Permian basin in Texas leading the way – but the prolific output is causing bottlenecks as pipelines transporting the crude have filled up more quickly than expected.
That has depressed prices there, according to Reuters, posing a threat to future production, while providing a boost to pipeline companies as the lines have filled to near-capacity.
With few new pipeline projects scheduled for this year, producers may be forced to slow drilling, or even shut in active production.
The problem illustrates the snags that can arise in transporting crude to the U.S. Gulf Coast as oil prices have rebounded to more than $60 a barrel and companies have reduced costs to make drilling more profitable in the Permian.
Production there is estimated to have hit a record 3.08 million bpd in March, nearly a third of overall U.S. production of 10.4 million bpd, according to the Energy Information Administration (EIA). Permian drillers are branching out into relatively less-profitable areas of the region, John Zanner, energy analyst for RBN Energy, told Reuters.
“As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast,” he said.
Most analysts estimated pipelines out of the Permian would fill completely by mid-2018, but this may already be happening. According to market intelligence firm Genscape, pipeline utilization from the Permian to the Gulf Coast averaged about 89 percent this year and 96 percent in the last four weeks.
U.S. crude for delivery in Midland, Texas WTC-WTM traded at $5.50/barrel under the price of benchmark futures on Wednesday, weakest since October 2014. West Texas Sour WTC-WTS, the sour grade delivered into Midland, traded as much as $6.25 a barrel below futures.
Midland light sweet crude currently trades at more than $8 a barrel below West Texas Intermediate at East Houston, a key delivery spot for export markets – the biggest discount on record.
“What the spreads are telling you is that these pipelines are full going to the Gulf Coast,” said Kendrick Rhea at energy consultancy East Daley Capital, told Reuters.
The wide spreads mean pipeline operators are now seeing a surge in demand and throughput, traders and analysts said.
Spreads have even widened enough to cover spot shipping rates, which are typically higher than long-term committed rates offered by pipeline companies.