Permian Crude Shippers Continue to Suffer - Houston WTI Drops Below Midland

Sixty percent of crude oil produced in the U.S. is exported, either as crude or in the form of gasoline, diesel, jet fuel or other petroleum products. Sure, a lot of crude and products are still imported, but the net import number is dwindling toward zero — and if you throw NGLs into the liquid fuels balance, the U.S. has been a net exporter since 2020. Yes, exports are now calling the shots in U.S. liquid fuel flow patterns, price differentials, infrastructure utilization and, to a great extent, the winners and losers in crude oil and product markets. It’s going to get way more intense as export economics increasingly dominate which pipelines, refineries and port facilities capture production growth from the Permian and other basins. In today’s RBN blog, we begin a series to explore this revolutionary shift in fortunes, why barrels move where they do and what it all means for U.S. producers, midstreamers, refiners, marketers, and exporters. And a warning! This is a subliminal advertorial for our upcoming xPortCon-Oil conference.

Over the past three-plus years, Corpus Christi has dominated the U.S. crude oil export market, largely because of the availability of straight-shot pipeline access from the Permian to two Corpus-area terminals at Ingleside — Enbridge Ingleside Energy Center (EIEC) and South Texas Gateway (STG) — that can partially load the huge 2-MMbbl VLCCs (Very Large Crude Carriers). But capacity on the pipes to Corpus is now nearly maxed out and, with Permian production rising and exports strong, an increasing share of West Texas crude output is instead being sent to Houston on pipelines with capacity to spare. The catch for Permian shippers with capacity on Permian-to-Houston pipes is that the Midland-to-MEH (Magellan East Houston) price differential for WTI has been depressingly low —$0.22/bbl on average this year, compared to almost $20/bbl for a few months in 2018 and averaging $5.50/bbl as recently as 2019. However, the Midland-to-MEH WTI price spread looks to be on the verge of a rebound of sorts, as we discuss in today’s RBN blog.

There’s a lot going on in North American crude oil markets these days. Exports are running strong. Midland WTI is now deliverable into Brent (but only if it meets specs). Pipelines from the Permian to Corpus Christi are maxed out, pushing incremental production to Houston. The price differential between WTI at Midland and Houston is nearing zero. And the value of heavy Western Canadian Select (WCS) delivered to the U.S. continues to bounce all over the place. Are these unrelated, random events in the quirky U.S. physical crude market, or are they logical developments linked by the economics of refinery preferences, quality shifts, export demand, and logistics? As you might expect, we think it’s the latter. Believe it or not, crude markets sometimes do behave rationally — and, from time to time, even predictably. That’s what we explore in today’s RBN blog.