REFINERY MARGIN TRACKER: Rising global crude prices seen cutting Permian capital discipline

Exports of American Gulf Coast Select crude are falling as high prices eat into margins, but rising global oil prices could entice US Permian producers to ease up on capital discipline and increase production more quickly than anticipated, an analysis from S&P Global Platts showed Nov. 8.

In China, AGS margins fell for the week ending Nov. 5 to $5.02/b compared with the $5.67/b for the week ended Oct. 29, while Singapore margins fell from $6.11/b to $5.48/b in the same time period, S&P Global Platts Analytics margin data showed, despite increased regional demand for distillates due to cold weather.

S&P Global Platts Analytics forecasts total US crude production to increase to 12.1 million b/d in 2022 from 11.1 million b/d in 2021, on more rig activity in US shale plays primarily in the Eagle Ford, Scoop/Stack and DJ Basins.

But the capital discipline practiced by Permian Basin producers could begin to weaken as long as the price of WTI remains above $80/b, where it has held over the past four weeks.

"The activity in the Permian is picking up," said Delek US Holdings CEO Ezra Uzi Amin said on his company's Nov. 5 third-quarter results call.

Besides owning four small refineries on the US Gulf Coast, Delek US is heavily dependent on Permian Basin crude, making their refinery economics particularly sensitive to production changes there. And the company's master limited partnership also owns pipelines which supply its own refineries with Permian Basin crude as well as sending barrels to the export market.

"I know that producers are saying they are going to be very disciplined," Amin said on the call. "But our DPG (Delek Permian Gathering) gathering system is growing by the day."

According to Energy Information Administration data, Permian production is expected to rise 62,000 b/d in November compared with October, to 4.88 million b/d. The uptick is due to production from new wells drilled mostly by small operators.

US crude exports fall as spread narrows

Delek US pegged Permian Basin growth in 2022 at 500,000 b/d to 600,000 b/d over 2021, Amin said. But he added, "...we are changing our mind as we speak because of the price of oil being around $80/b," without providing a new forecast.

The narrowing of the WTI/Brent spread – a key metric for determining crude arbitrage opportunities – will only push the Midland spread into negative territory, Amin said.

"Otherwise, the arbitrage won't make sense for export," he added.

The Brent/WTI spread narrowed to average 66 cents/b for the week ended Nov. 5 from the $2.23/b the week earlier, which cut volumes of USGC crude exports.

US Gulf Coast crude exports averaged 1.261 million b/d for the week ended Nov. 5, according to data from commodity tracker Kpler, about half of the 2.6 million b/d exported the week earlier.

USGC crude exports sourced from Midland averaged 1.463 million b/d for the week ended Oct. 29, falling to 753,000 b/d for the week ended Nov. 5, Kpler data showed.

However, flows from Midland to export terminals on the USGC are expected to increase as major pipeline projects are completed. The Wink-to-Webster pipeline, in which Delek US has a stake, is "coming online right now with the line fill," Amin said, adding full operations are expected in 2022.

Platts plans to add WTI Midland crude from the Wink-to-Webster and Midland-to-ECHO 3 into the AGS price assessments starting Jan. 3, 2022. Assessments for AGS crude currently includes Midland crude from the following pipelines: BridgeTex, Longhorn, Midland-to-Echo I/II, EPIC, Gray Oak, Cactus I/II and Permian Express.

"Our outlook for the production is that the Permian will continue to produce at high levels," Amin said.