The Permian Basin has attracted more than its fair share of attention due to its high pace of growth even in a low oil price environment.But since late March differentials have widened between the two grades: WTI Midland and MEH. This is a clear sign that the 300,000 b/d cushionin takeaway capacity is eroding fast.
S&P Global Platts editors Ashok Dutta and Mary Hogan discuss the Permian Basin and what may happen as the summer nears, with major midstreamers having few solutions to offer.
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COMMODITIES SPOTLIGHT: Widening crude differentials and the Permian Basin
ASHOK DUTTA: Welcome to the Commodities Spotlight Podcast from S&P Global Platts, I’m Ashok Dutta, senior oil news editor, and am joined by Mary Hogan, associate editor for the US crude market.
The Permian Basin has attracted more than its fair share of attention due to its high pace of growth even in a low oil price environment. S&P Global Platts Analytics is projecting output to grow 1.2 million b/d this year and reach 3.9 million b/d by December. That’s a phenomenal 100,000 b/d of new production being added each month.
But since late March we see differentials widen between the two grades: the WTI Midland and MEH. This is a clear sign that the 300,000 b/d cushion in takeaway capacity is eroding fast. With major midstreamers like Enterprise, Energy Transfer, Plains and Magellan, to name a few, having few solutions to offer soon, differentials will only widen further as we get into the summer.
Mary, talk us through that story.
MARY HOGAN: Some in the industry think that WTI Midland diffs could fall as low as minus $12 versus WTI cash in the coming months. Currently, the spread is at about $8.65/b. In March, over-nomination of pipeline volumes began adding substantial downward pressure on the price of WTI Midland crude. The fall in prices could be a result of overreaction in the market due to these over-nominations.
However, with production gains expected to continue, pipeline takeaway capacity is anticipated to remain tight through the end of the year. As a result, diffs could remain low. Some relief could come as Enterprise’s Midland to Sealy line reaches full capacity of 450,000 b/d in June.
AD: We know some volumes are already being railed and trucked from the Permian. The EIA says in January some 18,000 b/d of crude were on rail cars in PADD III which includes Texas. But how expensive will rail be?
MH: Current estimates put rail costs between $6 and $8 per barrel. This means the price of WTI Midland would need to stay well below that spread in order to incentivize rail shipments from the Permian basin to markets on in to Houston and Corpus Christi. Trucking is another option for suppliers. However, trucking costs generally average about three times the cost of crude by rail. So many in the industry see this option as being less economic than crude by rail.
MH: Let me ask you Ashok, how do you think will producers react?
AD: Shut in is not an option even if their crude is not being discounted. Shutting in of wells is not an easy option in the shale industry as the rate of decline is very steep and also some of the new wells may be jeopardized. The older wells may still be able to ramp up to previous capacity. But the last thing we want will be orphan wells in the Permian. Also, in a WTI $65/b world and a rate of return of 63%, the bottom line for producers will still not be touched.
AD: Mary, you've been covering this market and did it come as a surprise that differentials would widen like the way they have now?
MH: I think the rate at which the spread has widened has taken many, including myself, by surprise, yes. In the fourth quarter of 2017, the spread between WTI prices at Midland and Houston averaged $4.34/b. Moving into 2018, this spread narrowed to $2.56/b, before it began widening back out again in March. Demand for WTI Midland barrels at Cushing had improved following the startup of the Cushing to Memphis Diamond pipeline. So this caused the spread to narrow some in late 2017 and early 2018.
At this point, shippers with committed volumes on existing pipelines out of the Permian stand to gain the most. They’re able to buy initial volumes of WTI Midland at very low prices and sell them in Houston and Corpus Christi to capitalize on that difference in the spread.
AD: Permian producers have not shied away from taking issues head on. They responded to low prices by reducing drilling and operations costs and still generating healthy cash, while at the same time producing those light barrels that refiners so desire globally.
Today, they have handed over the US the potential of being a leading crude exporter. What we are facing now will change in 18 months from now as new long-haul pipelines get built. But until then producers will find a way to take their barrels out.
Thank you, Mary for your insights. You can find more news and analysis at Platts.com. Thanks for listening.