Don't Play No Game That I Can't Win - Lotteries, Shippers and Trends in Midland Price Differentials

Since early this year, the Midland crude differential has continued to widen, trading one day last week at a discount of $15.75/bbl to West Texas Intermediate (WTI) at Cushing, the widest spread since August 2014 before settling back to $11.25/bbl on Monday. The wide price differential is a result of fast-growing production in the Permian and bottlenecked takeaway pipelines. But the trajectory of this increasing price spread has been anything but smooth. Lately, we have seen a blip in the price differentials right around the 19th or 20th of the month. In each of the last three months, for a short-lived 24 to 48 hours, the Midland-Cushing price differential has narrowed by $2/bbl or more as Permian shippers have gone on feeding frenzies. Today, we look at these brief upticks in pricing and the pipeline and trader mechanics behind them.

As we discussed in our All Dressed Up With No Where to Go series, Midland crude prices have taken an increasingly steep dive since the start of February 2018. After averaging a meager $0.34/bbl discount to WTI at Cushing in 2017, the Midland discount to WTI has increased to as much as $15.75/bbl in recent days and has averaged $12.80/bbl since the start of July 2018. But in the last few months, as pipelines have been consistently full, we’ve seen brief spikes in the Midland-Cushing differential around the middle of the month in April, May and June. On April 18, the spread narrowed from $4.10/bbl to $2.75/bbl, and then widened back out to $4.50/bbl two days later (first red circle, Figure 1 below). On May 21, the spread narrowed from $7.25/bbl to $5.50/bbl and then back out to $9.50/bbl two days later (second red circle). Most recently, we saw the Midland-Cushing spread narrow $5.75/bbl to $3/bbl by June 21st and then move back out to $9/bbl a few days later (third red circle). When viewed together, these price spikes for Midland crude — all at around the same point in time of the month — tell us something about what’s going on with Permian pipes and the traders moving volume on them.

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