The Permian Basin’s crude oil market over the last 18 months has exhibited so many dynamic changes that dedicated observers may be suffering from a bit of neck strain, if not outright whiplash. We’ve seen production rise at an unprecedented rate, followed by a period of slower growth. We’ve also watched the Permian very quickly transform from a region desperate for new long-haul pipeline capacity to a hotbed for midstream investment and infrastructure growth. While we’ve closely tracked these big-picture changes, a lot of other, smaller-scale knock-on effects have been occurring too, with potentially significant implications for the basin’s supply pricing and transportation economics. Today, we explain why the changing fortunes of Permian crude haulers may benefit producers in the basin.
The Permian’s crude-oil landscape is continually changing — there is absolutely no doubt about that. Over the past four months alone, we have seen two new pipelines come online: first, Plains All American’s Cactus II pipeline (capacity of 585 Mb/d), and, more recently, crude oil flows on the new EPIC system (interim capacity of 400 Mb/d). In addition, we expect the Gray Oak Pipeline, with a capacity of 900 Mb/d, to begin operations by the end of the year. All three pipes have origination points in West Texas with the ability to deliver large volumes of crude to Gulf Coast refineries and export terminals. (For more detail on all of these, check out our recent blogs covering them, as well as our weekly Permian Crude Oil report.)
As this new pipeline space has come online — much of it offered with super-low tariffs — pricing differentials between Midland and Cushing (left graph in Figure 1) and Midland and the Gulf Coast (right graph in Figure 1; MEH stands for Magellan East Houston) have moved dramatically. Midland barrels, which traded at more than a $15/bbl discount to Cushing and a nearly $25/bbl discount to the Gulf Coast as recently as last year, are experiencing a pricing renaissance. In September, Midland actually averaged a premium of $0.50/bbl to Cushing, and the discount to the Gulf Coast tightened sharply to an average of just $4/bbl.
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