Thinking Out Loud - The 2020 Outlook for Permian Oil and Gas Markets

With 2020 already in full swing, some things in the Permian Basin’s oil and natural gas markets have changed dramatically since this time last year, others not so much. When it comes to crude oil, new pipelines that came online during 2019 had a huge impact on differentials: Permian barrels are now pricing very close to other regional hubs, versus massive discounts a year ago. That has enabled Permian producers to fully benefit from the recent run-up in global oil prices. On the gas side of things, the start of the new decade won’t look much different than the end of the last one. There is still way too much supply and not enough takeaway capacity. That means that regardless of what happens at Henry Hub, the U.S. benchmark for natural gas prices, Permian producers should expect dismal values for their natural gas in 2020. Today, we take a look at the year ahead for Permian producers.

The Permian Basin was the big topic here at RBN in 2019; three of our most widely read blogs were Permian-focused, and our #1 blog last year, titled Hard Hat and a Hammer, explored how new crude oil pipelines from the Permian to the Texas Gulf Coast would narrow the price differentials producers received in the basin. That spread, as measured by the differential for West Texas Intermediate (WTI) crude oil between the hub at Midland and the Magellan East Houston (MEH) terminal, had blown out to almost $20/bbl in the summer of 2018 (purple line within the dashed red circle in Figure 1), but bounced back to average $5.50/bbl in 2019 as new pipeline capacity started coming online. The Midland-MEH spread starts 2020 at only $2.25/bbl, and the forward curve shows that the market expects it to remain near that level throughout this year. However, as we noted in our 2020 prognostications blog last week, we wouldn’t be surprised to see the spread tighten to around $1.00-$1.50/bbl. That view is based upon still more pipeline takeaway capacity being added and ramping up in the Permian; Phillips 66 is currently in the process of bringing online its 900-Mb/d Gray Oak Pipeline. Following Gray Oak, the next big addition planned is the Wink-to-Webster Pipeline from West Texas to the Houston area; the project, whose capacity is said to be north of 1 MMb/d and which is slated for completion in early 2021, is being developed by a number of joint venture partners, including Plains All American and ExxonMobil.

There’s been a lot of market buzz that Enterprise Products Partners took a 29% undivided joint interest in the Midland-to-Webster leg of the Wink-to-Webster project this past fall, and that Enterprise’s planned 450-Mb/d Midland-to-Echo 3 (M2E3) pipeline, scheduled to start up in the second half of this year, actually represents that 29% stake. If that’s the case, and the Midland-to-Houston-area portion of Wink-to-Webster comes online this summer or fall, there could be much more than just 450 Mb/d added between Midland and the Houston market later in 2020. As a result, we would expect the Midland-MEH spread to continue to shrink, given that the new capacity should be more than ample to soak up the Permian crude’s expected 2020 growth of about 500 Mb/d. For more details on the latest in the Permian crude oil market, see our weekly publication on the subject, the Crude Oil Permian report.

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