EIA: Higher Permian production, insufficient pipelines hike WTI oil hub spreads

Crude oil prices in the Permian basin at Midland, Tex., have been falling below similar crude priced at Cushing, Okla., due to increasing production in the area and insufficient pipeline systems to move the crude to refineries, according to an analysis of the US Energy Information Administration.

“While the price difference between Midland and Cushing has been increasing for almost a year, recent refinery outages in the region caused it to widen substantially,” EIA said.

EIA’s latest Drilling Productivity Report (DPR) estimates that August Permian basin oil production will be almost 1.7 million b/d, 0.3 million b/d more than a year ago. A series of recent outages at refineries in or near the Permian, and along the US Gulf Coast caused the West Texas Intermediate price at Midland to fall $17.50/bbl below the price at Cushing, a record difference.

The previous record was set in late 2012 at a time when production also exceeded pipeline takeaway capacity. The price gas closed in 2013 when Magellan Midstream Partners reversed and repurposed part of its Longhorn Pipeline to move crude from the Permian to Houston, with a capacity of 225,000 b/d. In addition, the first expansions on the Sunoco Logistics Partners’ Permian Express pipelines and other portions of Sunoco’s pipeline system also came online in 2013.

“However, the increase in crude oil production has now outgrown these expansions, and additional pipeline expansions are under construction,” EIA said.

With several projects that will allow more crude to flow from the Permian to the Gulf Coast coming online soon, this price difference is expected to narrow.

Magellan’s 300,000-b/d BridgeTex Pipeline, which will move crude from West Texas to refining centers in Houston, Texas City, and Galveston, is expected to begin operating soon. Beginning in early 2015, the Cactus Pipeline, with an expected capacity of 200,000 b/d, will move Permian crude south to connect with an expanded Eagle Ford Pipeline that will deliver crude to Corpus Christi, Tex.

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