Skip to comments.Not enough pipelines, so crude sells at discount
Posted on 11/26/2012 8:31:04 AM PST by thackney
A $21 price difference between crude oil in Midland and Cushing, Okla., is an all-time high, as oil production in the Permian Basin far outpaces the pipeline infrastructure to move it.
The spot price for West Texas Intermediate crude was about $87 per barrel this week in Cushing the delivery point at which the U.S. benchmark oil is priced versus $65 per barrel in Midland. The two only differed by $3 in October, according to a Wells Fargo report.
If I produce a barrel of oil in the Permian, my ability to move it to market is restricted, said Ed Hirs, an energy economics professor at the University of Houston. The pipelines are full. The only way out is trucking. To truck it to Cushing or Gulf Coast markets, I am going to incur a $20 per barrel charge.
That West Texas glut means oil purchasers there expect to pay less.
Although backups at Cushing have made West Texas Intermediate cheaper than the international benchmark Brent crude, the congestion is more serious in West Texas.
Startup delays for Phillips 66′s Borger refinery in the Texas Panhandle have contributed to the Midland price swoon, Wells Fargo said.
The growing production in the Permian, combined with downtime in other refineries and efforts to shrink inventories to reduce year-end taxes, also are contributing to the slumping demand for West Texas Intermediate in Midland.
Tudor Pickering expects the Midland discount to decrease within two weeks, when the Borger plant goes back online.
The price differential is expected to ease further when additional pipeline projects become operational on the Gulf Coast in the first quarter of next year, according to Tudor Pickering.
Several planned projects will expand pipeline capacity in Texas.
Sunoco Logistics Partners Permian Express pipeline, which will have an initial transport capacity of 90,000 barrels per day, is expected to go online between Wichita Falls and Houston in early 2013.
The reversal of Magellan Midstream Partners Longhorn Pipeline also is slated to be up and running early next year. The revamped pipeline will run from El Paso to Houston, rather than the other way, and carry crude instead of refined products. Its projected capacity is 135,000 barrels per day.
Magellan and Occidental Petroleum also are aiming for a 2014 completion of the BridgeTex pipeline, which will run 400 miles from the Permian Basin to Houston with a capacity of 278,000 barrels per day.
The additional pipelines are expected to bring Midland crude up to Cushing prices, eliminating most if not all of the price spread.
As producers have an ability to take it to market, they will converge on the market price, Hirs said.
can wells created by fracking be profitable at 65.00?
If it stays at $65 bottleneck in the area, it will certainly reduce the amount of drilling.
There is no magic drill/no drill number for all wells. Each has there own economic point and it will vary for companies as well. As the price goes down, there will be less; as the price goes up, there will be more.
thanks - I thought that much of the Midland oil production was coming from work in old wells being treated with new technology and this was allowing some to get a good profit on old oil - it that true?
I do not believe most of the increased production is from old wells. Shale plays a significant part of the new production.
One more reason why rail tank cars are scarce as hen’s teeth.