Daily Energy Blog

Price differentials in the Permian Basin are widening at a rapid pace. The discount for Midland crude to West Texas Intermediate (WTI) at Cushing has widened by over $4/bbl since the beginning of March and the discount to Magellan East Houston (MEH) crude was over $7/bbl yesterday. Permian production is increasing at a breakneck pace as new players are entering the scene. Private equity-backed exploration and production companies (E&Ps) are no longer just acquiring and flipping acreage, as they are being forced to prove their assets are profitable and can generate a return on investment. The combination of large drilling plans from the majors and new production from these smaller operators — with no new pipeline takeaway capacity in sight — has sent Permian crude pricing into a tailspin. Today, we begin a new series on the recent slide in Permian prices, how new producer strategies are contributing to it, and what it means for pipeline space, trucking and midstream infrastructure.

Crude oil and natural gas production in Oklahoma have fully rebounded from the declines that followed the 2014-15 collapse in oil prices and stand at 21^st-century highs. While the active rig count in the state — at about 120 in recent weeks — is off 10% from its post-crash peak in mid-2017, the productivity of new wells continues to rise, as does interest in the Merge play between the SCOOP and STACK production areas in central Oklahoma and in the Arkoma Woodford play to the southeast. All that has put additional pressure on the state’s existing pipeline and gas-processing infrastructure and spurred continuing activity among midstream companies. Today, we begin a review of ongoing efforts to add incremental processing and takeaway capacity in the hottest parts of the Sooner State.

With crude prices in the $60s, oil-producing basins other than the Permian are finally seeing signs of life, and that includes the Rockies. But volumes flowing through the most important Rockies crude oil hub — at Guernsey, WY — are down. Moreover, the price of oil at Guernsey is up, trading at least flat and sometimes at a premium to the downstream market at Cushing, OK, suggesting that committed shippers are having to bid up the price at Guernsey to secure barrels for their downstream pipeline commitments. What about production from the nearby Powder River Basin? Well, Powder River oil production is up, and the rig count there is double what it was this time last year, so you might think there would be more than enough barrels at Guernsey. But not so. Who’s to blame? We need to look no further than the Bakken and the Dakota Access Pipeline (DAPL) to discover our culprits. Today, we check in on the market at Guernsey and consider the impact of DAPL, the implications for Rockies crude oil outflows, and what it all means for Guernsey price differentials.

Crude oil production in the Permian Basin is coming on strong — faster than midstreamers can build pipeline takeaway capacity out of the basin. You can see the consequences in price differentials.  On Friday, the spread between Midland, TX and the Magellan East Houston terminal (MEH) on the Gulf Coast hit almost $5.00/bbl, a clear sign of takeaway capacity constraints out of the Permian. We’ve seen different variations of this scenario play out in recent years, most recently last fall, just before the first oil started flowing through the new Midland-to-Sealy and Permian Express III pipelines, and it’s not good news for Permian producers. Now Permian output is again bouncing up against the capacity of takeaway pipelines and in-region refineries to deal with it. As we’ve seen in the past, that’s a warning sign for possible price-differential blowouts. Today, we discuss the fast-changing market dynamics that put Permian producers at risk for another round of depressed Midland prices.