According to the US Energy Information Administration (EIA), increasing production of crude oil in the Permian Basin has outpaced pipeline infrastructure to move the crude to refineries, causing prices for crude in the Permian to fall below similar crudes priced at Cushing.
While the discount of Midland prices to Cushing prices has been increasing for almost a year, recent refinery outages in the region have caused it to widen substantially. Several infrastructure projects that will allow more crude to flow from the Permian to the US Gulf Coast are expected to come online soon, which should narrow the discounts of crude oil at Midland.
This week, EIA data shows that the WTI-Midland to WTI-Cushing discount reached US$ 17.50/bbl, surpassing the previous record discounts of late 2012, when production exceeded pipeline takeaway capacity. Those record discounts began easing when Magellan Midstream Partners in 2013 reversed and repurposed its Longhorn pipeline to move crude from the Permian to Houston.
Strong production is again causing weak prices in the Permian. EIA estimates that in August Permian production will be almost 1.7 million bpd, 0.3 million bpd more than a year ago. However, refinery outages are also contributing to widening differentials. Trade press has reported that Phillips 66 has shut down for repairs its 140 000 bpd refinery in Borger, Texas, which uses crude produced in the Permian. In addition, outages at refineries in Houston and Port Arthur are reducing demand for Permian crude oil.
According to the EIA, the current situation in the Permian is beginning to affect the two Midland-priced grades of crude, WTI and West Texas Sour (WTS) differently. Most of the recent production increases in the Permian have been light sweet WTI grade crude. The increase in Permian light sweet production combined with increasing supplies of light sweet crude from other Gulf Coast producing regions, such as the Eagle Ford, have put downward pressure on the price of Midland WTI.
While production of sour crude has also grown, it has not increased as much as light sweet production. The significant capacity of many Gulf Coast refineries to process sour crude oil has supported the WTS Midland price. Midland WTS is currently trading at a US$ 9/bbl premium to Midland WTI.
Adapted from a press release by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/22082014/crude-oil-price-spread-1173/