Even Flow - Crude Oil Pipeline Rate Compression from Permian and Cushing to the Gulf Coast

Like the proverbial dog who finally catches the truck he’s been chasing, only to wonder what to do next, midstreamers at long last have brought on enough crude oil pipeline capacity to move Permian barrels to the Gulf Coast. In fact, right now there appears to be more than enough pipeline space, with several pipes flowing less than their capacity. What midstream companies now face is a race to the bottom as their pipelines compete with each other to attract barrels by offering service to Gulf Coast markets at the lowest price — resulting in transportation rate compression. Today, we begin a blog series on the tug-of-war for barrels and its effect on prices.

Crude oil production growth in the Permian Basin has been meteoric. The region’s output has more than doubled since the beginning of 2017, from about 2.1 MMb/d then, to more than 4.6 MMb/d today. As production ramped up, midstream companies scrambled to develop and build outbound pipelines to move those barrels to market, primarily to points along the Gulf Coast for refinery use or exports. As we discussed last year in our blog series All Dressed Up With Nowhere To Go, crude production growth often outpaced pipeline capacity additions, and as a result, oil prices in the basin traded at a discount.

Midstreamers have finally caught their truck — there’s now more than enough pipeline capacity to handle today’s needs. We can see it in our Crude Oil Permian report, and a couple months ago, when Plains All American’s (PAA) Cactus II pipeline and the EPIC pipeline system were moving toward full operation, we said in our blog, Higher Ground, that the days of “Midland-Magellan East Houston (MEH) basis blowouts may just be water under the bridge.” We even went as far as to say that the spreads might shrink even more than what the forward curves at that time indicated.