The Permian Basin is awash in light, sweet crude oil that’s cheap to produce and easy to process. It’s so awash, in fact, that supplies are overwhelming takeaway pipeline capacity. The resulting bottleneck in West Texas has cratered prices in Midland, where West Texas Intermediate (WTI) — the region’s light, sweet benchmark — has blown out price-wise against the same grade in other locations, including Houston, with its crude-export docks. Less well known, but influential beyond its geography, is Midland West Texas Sour, or WTS. WTS is suffering from the same wide differentials as WTI at Midland, and those yawning spreads are dragging down the price of Maya, Pemex’s flagship heavy, sour crude. Today, we discuss some surprising ripple effects of takeaway constraints out of the Permian.
As crude output in the wildly prolific Permian rocketed past 3 MMb/d — and beyond the region’s pipeline takeaway capacity — a day of reckoning came for the price of oil in West Texas. We talked about the precarious pricing for WTI at Midland in We Gotta Get Out of This Place, which noted the relationship between pipeline constraints and the teetering value in West Texas. Midstream companies are racing to build the pipelines needed, as we examined in Help On The Way. In No Time, we showed how increasingly desperate shippers are pondering the feasibility of long-haul trucking or revived crude-by-rail to mitigate the takeaway crisis. The market is like quicksand for price differentials now, as supply keeps growing and additional pipeline capacity — while under development — isn’t coming online soon enough.
And it’s not just WTI at Midland that’s being hit. WTS — the heavier, more sour counterpart to WTI at Midland — is in the same sort of takeaway lockdown as its lighter, sweeter brother, and has been suffering a similar price crash. Given that WTS has a lower API gravity than WTI (32 to 35 vs. 37 to 42) and higher sulfur content (1.5% vs. 0.45%), WTS requires a more intense degree of refining — that is, more complex (and expensive) coking and hydrocracking equipment — to break the crude down into the most valuable mix of refined products. (As regular readers of RBN blogs know, the Gulf Coast has more than its share of these complex refineries thanks to decades of major investments by their owners. See I’d Like To Buy The World A Coke for more on cokers.)
One victim of WTS’s low-price predicament is Mexico’s flagship heavy grade, Maya. As we said in It Ain’t Heavy, It’s My Maya, Maya is a very heavy, very sour grade — 22 API gravity and 3.5% sulfur — that makes up just under half of state-controlled Petróleos Mexicanos’ (Pemex) total production and most of Mexican crude exports. Pemex’s own refineries largely lack the upgrading capacity to effectively process Maya; historically its natural market and primary destination has been coking refineries along the U.S. Gulf Coast. (See Complex Refining 101 for more on refinery upgrading processes.)