Stuck In Midland With Crude - Refinery Cuts, Emerging Crude Production Losses Drive Permian Volatility

Well, it’s happened. The first signs of crude oil and gas production curtailments in the Permian Basin materialized over the weekend. That has followed weeks of extreme oversupply conditions, growing storage constraints and distressed pricing, all to deal with the abrupt and unprecedented loss of refinery demand for crude oil due to COVID, not just along the Gulf Coast, where the lion’s share of the U.S. refineries sit, but also more locally in West Texas. The rapidly shifting supply-demand balance, first from reduced local refining demand and now also the emerging production cuts, is adding volatility to the spreads and flows between the West Texas basin’s regional hub at Midland, and downstream hubs at Cushing and Houston. Today, we look at how the Midland market has responded to the downturn in local refining demand, and how production losses will factor into the balancing act.

We’ve done our best to keep on top of a quickly moving crude market, detailing the recent emergence of negative crude oil prices in One Way Out. We followed that with Future(s) Games, where we focused on crude oil pricing mechanisms, and last week in How Much More Can I Take, we considered the prospects and timing of crude oil and refined products storage constraints. We’ve also zeroed in on regional dynamics in the Permian, including the recent trend in spot prices for both crude oil and natural gas (see It’s Always Somethin’). Now, we dig into the details of how the recent flux in global markets has impacted the Permian oil supply and demand balance, as well as price spreads between the Permian and neighboring markets. We then evaluate what those price spread movements mean for crude oil flows on the pipelines leaving the basin.

The Permian supply and demand balance for oil is made up of three primary components: production, local demand and pipeline outflows. While we won’t dive too deeply into Permian oil production, the expectations for which have shifted sharply lower over the past few weeks, just know that our estimates currently put it at about 4.7 MMb/d. Local demand consumes up to about 450 Mb/d, driven by crude consumption from the four refineries (shown below in Figure 1) that source directly from the Permian. The rest of the Permian’s oil, about 4.2 MMb/d, flows out of the basin, serving refineries and export docks in other regions.

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