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Permian crude differential hits lowest since Aug 2014 as output tops expectations

Houston — Permian Basin light sweet crude WTI Midland fell to its lowest level inmore than three and a half years Tuesday, with rising production and limitedtakeaway capacity pushing down the grade's differential.

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On Tuesday, S&P Global Platts assessed WTI Midland at WTI cash minus$8.35/b on trade data heard, down $2.25/b compared with Monday's assessment.Tuesday's differential is the lowest assessment for WTI Midland since August26, 2014, when the differential dropped to minus $9/b.

Earlier in the day, the grade had traded as low as minus $11/b beforeslightly recovering by the early afternoon to its assessed value.

Permian sour grade WTS Midland also fell to a multi-year low, dropping$2.80/b day on day to be Tuesday assessed at WTI cash minus $9/b, its lowestdifferential since January 25, 2013's minus $17.50/b.

RISING PRODUCTION PRESSURES DIFFERENTIALS

Permian Basin oil production is forecast to increase 1.2 million b/d in2018, compared with last year, or 100,000 b/d each month, and is expected toreach 3.9 million b/d by December, according to data from S&P Global PlattsAnalytics.

May output is expected to average 3.18 million b/d, according to datafrom the US Energy Information Administration, although the productionestimate is slightly lower than total Permian pipeline takeaway capacity of3.3 million b/d.

This surge in regional crude production, facilitated by generally higherglobal oil prices, has tightened takeaway capacity from the Permian. With 3.3million b/d of Permian takeaway capacity, April 15 pipeline allocationsreduced the remaining spot capacity available for the month, according toindustry sources.

The capacity connecting Permian production with the Houston marketincludes Enterprise Products Partners' 575,000 b/d Midland to Sealy pipeline,Magellan Midstream Partners' 275,000 b/d Longhorn pipeline, the 400,000 b/dBridgeTex pipeline, co-owned by Plains All American and Magellan, and Sunoco's200,000 b/d Permian Express Line. Plains All American's 390,000 b/d Cactuspipeline transports Permian crude to Corpus Christi, Texas.

Some producers are beginning to truck volumes out of the Permian to thenearby Delaware Basin, where they can then be loaded on rail cars andtransported to Houston, despite typical rail costs of $6/b to $8/b andtrucking costs that average three times that range.

MIDLAND TO HOUSTON SPREAD WIDENS

As volumes of WTI Midland become increasingly stranded in Midland, Winkand Crane, Texas, the Permian to Houston spread has continued to widen. Strongexport demand for WTI MEH, representing WTI Midland crude at the Magellan EastHouston terminal, has kept MEH prices relatively stable.

On Tuesday, WTI MEH was assessed at WTI cash plus $2.60/b, putting theMidland to Houston spread at $10.95/b. This represents the spread's widestlevel since Platts began assessing the value of WTI MEH in February 2015.

With WTI Midland volumes at Corpus Christi priced on average 10 cents/bto 15 cents/b higher than MEH volumes, according to sources, the Permian toCorpus Christi spread could be as wide as $11.10/b.

--Mary Hogan, mary.hogan@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com