Rising Permian basin light crude production continues to weigh on West Texas Intermediate (WTI) Midland's discount to WTI Houston, keeping the spread at around $3/bl or greater for the eighth consecutive trade day.
With more available production, shippers with take-or-pay commitments on outbound pipelines from the Permian are less likely to need to purchase crude from the spot market, instead shipping their own supply.
May WTI Midland is trading at $1.50-$1.55/bl discounts to the US benchmark in Cushing, Oklahoma, this morning while May WTI Houston traded at a premium to Cushing of $1.60/bl, putting the Midland discount to Houston at around $3.10-$3.15/bl.
Prior to last week, the WTI Midland discount to WTI Houston had not been wider than $3/bl for more than two consecutive days since September 2016. The spread had not been consistently $3/bl or wider since June 2015, shortly after Argus began assessing WTI at Magellan's east Houston terminal in late-February 2015.
But West Texas and New Mexico crude production has been rising and pipelines from Midland to Cushing are thought to be running at capacity, increasing the amount of crude supply available at Midland and weighing on the WTI value there.
The cost to ship crude on Plains All American's 450,000 b/d Basin pipeline from Midland to Cushing is about 80¢-90¢/bl, more than covered by WTI Midland's discount to Cushing at an average to date of around $1.20/bl for May trade. The current spread is not enough to cover the roughly $2/bl in published costs for the same route by way of Occidental Petroleum's Centurion pipeline. But much of the 140,000 b/d Centurion capacity provides refinery supply upstream of Cushing, is used for sour crude, or is full before crude originating in Midland could be injected.
WTI can also be shipped to the Gulf coast from west Texas, but these lines are also thought to be running close to capacity. Since main pipelines from the Permian have take-or-pay commitments in place, throughputs on the lines are more stable as shippers use line space even when locational arbitrages in Texas appear unfavorable.
But the WTI Midland discount to Houston is still not wide enough to cover uncommitted shipper costs which are roughly $4/bl.
LLS also boosts Houston
In addition to rising production weighing on Midland values, at the other end of the pipelines WTI Houston has been supported by strong Light Louisiana Sweet (LLS) prices, which have been boosted by US midcontinent demand for light crude.
On 7 April, LLS climbed to a $2.35/bl premium to Cushing, its widest since March 2016. LLS has been supported by strong Canadian crude prices following the outage of an oil sands upgrader, a wider WTI discount to Ice Brent that is helping to improve the export economics, and the ramp up of refinery runs ahead of the US summer driving season. LLS has since softened to a premium to the benchmark of about $2.15/bl. But the May month-to-date average of $2.06/bl is higher than previous LLS trade month averages since June 2016.
A softer LLS premium has helped to narrow the WTI Houston premium to Cushing slightly, narrowing the spread for WTI between Midland and Houston by about 10¢/bl from a week ago to $3.07/bl yesterday.
But the May WTI Midland month-to-date discount to Houston is still averaging about 60¢/bl wider than the April trade month average spread of $2.85/bl. In April, WTI Midland averaged $2.25/bl under WTI Houston, the deepest the locational discount had been since July 2015.
The spread is poised to stay wide as Permian basin crude output continues to rise. Production is projected to grow by 79,000 b/d in April from 2.207mn b/d in March, according to the latest available estimates by the US Energy Information Administration (EIA).
At various points between 2012 and 2014, WTI Midland was at double-digit discounts to Cushing. It reached a record discount to the basis of $19.13/bl in August 2014.
Pipeline plans abound
But plans are underway to accommodate rising Permian basin production for delivery to the Texas coast, which if completed in time may keep the WTI Midland discount to Cushing from widening as markedly as it has in years past.
Plains and Magellan are expanding their BridgeTex pipeline to 400,000 b/d from 300,000 b/d by July.Plains also plans to expand its Cactus pipeline to about 390,000 b/d from 250,000 b/d by October. Cactus ultimately feeds Occidental's export terminal at Ingleside near Corpus Christi from where exports of Midland-sourced WTI have been popular.
Sunoco Logistics is planning to boost capacity of its Permian Express system to Nederland in southeast Texas by as much as 300,000 b/d through 2018, 100,000 b/d of which could be in place by this summer.
To increase deliveries to Houston, Enterprise Products Partners is building a 450,000 b/d crude line from the Permian to the Houston area that is expected to be ready by year's end.
The line will take crude from Midland to Sealy, west of Houston, to be delivered to to the Enterprise Echo terminal on the Houston Ship Channel. From Echo, oil can be shipped to refineries in Houston, Texas City, Beaumont, Port Arthur, and to Enterprise docks.
Further out, TexStar Midstream Logistics is holding an open season for the initial 200,000 b/d of capacity on its proposed 440,000 b/d Epic pipeline to Corpus Christi, looking at an early-2019 startup.
And Buckeye Partners is expected to have an open season in the third quarter for the 400,000 b/d South Texas Gateway pipeline from the Permian to its existing Corpus Christi terminal for a 2019 start as well.
