The Crude Report: Midland narrows in on Houston

Автор Argus

More than one year after the Nymex Cushing benchmark sank below zero for the first time ever, crude oil demand remains weak as a poor arbitrage from the Permian basin limits sell-side opportunities.

Permian spot trade liquidity at the US Gulf coast has shifted toward refinery supply rather than exports, ultimately deteriorating the pipeline arbitrage and weighing on spot trade liquidity as speculative buying dies out.

In this episode of The Crude Report, Argus Americas Crude Associate Editor Amanda Hilow and Deputy Editor Amanda Smith, discuss the Midland-to-Houston spread, key elements weighing on market opportunities and expectations going forward.

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Amanda Hilow: Hello, and welcome to "The Crude Report," an Argus podcast on global crude oil markets. I'm Amanda Hilow, and I'm joined by Deputy Editor Amanda Smith. We're going to talk about the strained pipeline arbitrage from the Permian Basin to the Texas Gulf Coast and how it's morphed into what seems to be the new normal for the industry. Welcome, Amanda.

Amanda Smith: Thanks, Hilow. So, we are more than a year past NYMEX's historical crash to pricing below zero. And it doesn't seem like the resulting shift in trade patterns connected to WTI in Texas will disappear any time soon. So, right now, we're seeing WTI in Midland, so in West Texas, it's discount to WTI in Houston at Magellan's East Houston Terminal on the Texas Gulf Coast, we're seeing that Midland-to-Houston WTI spread averaging around 45 cents a barrel so far in the July trade month.

And it's been more or less about 50 cents a barrel for each trade month since the February trade month. So, we've been seeing that the lower export demand has been, you know, reducing the demand at the coast. It's been lowering speculative buying at Magellan East Houston. It's been pressuring that Houston liquidity lower, and we're seeing trade patterns shifting so that the buying is more towards refinery supply rather than being connected to exports as much as it was before. And then we're also seeing some of the Permian volumes, we think they're likely being diverted to Corpus Christi.

Amanda H.: That lines up with what I've been seeing in the waterborne market lately as well. Exports just are not as attractive as they used to be. We're seeing WTI fob Houston pricing at a discount to WTI Houston, the pipeline market, as lockdown measures meant to staunch the flow of Covid-19 had interrupted demand for U.S. crude grades.

And, typically, what FOB being at a discount to the pipeline market means is that sellers will need to eat their own loading costs in order to place cargos internationally. So, oftentimes, export volume falls as a result of this shift as sellers end up trying to place their cargos with domestic refiners rather than trying to hunt down a home globally.

Exports, overall, have been relatively resilient through the Covid pandemic due to the long-term contracts. But we have seen a steady trickle lower over the course of this pandemic. May, U.S. crude exports were estimated around 2.77 million barrels per day by the EIA, and that's down roughly 470,000 barrels per day from the official April statistics that we got from the U.S. Census Bureau.

Of that volume, Houston exports only comprised 15% of total outbound volume from the U.S. Gulf Coast. That's a huge difference compared to more than 50% of total U.S. crude exports that are coming out of Corpus Christi, as Corpus Christi is becoming the primary export hub. WTI fob Corpus Christi is currently priced at a premium to Houston-based cargos, which is a pretty big shift. And about two years ago, it was consistently... Not even two years ago, actually, it was early 2020, we saw Corpus Christi add a sizeable discount to Houston cargos due to the new capacity that had come online at the Permian Basin. It was just cheaper to ship crude to Corpus Christi rather than to Houston. But now, we're seeing Corpus priced at a premium despite the more economical logistics because demand is moving to Southeast Texas rather than Houston.

If you were to look at the WTI locational spreads that we publish for "American GulfCoast Select," Corpus Christi is currently fetching the highest value across 11 different terminals that we index WTI at.

Amanda S.: So, it does make sense for producers to wanna ship more crude to Corpus instead of Houston, with more economical logistic prices on the pipelines. And, you know, you mentioned the newer pipeline capacity in going to Corpus. And, Houston, so we see, like, for the BridgeTex Pipeline to Magellan's East Houston Terminal, the lowest committed pipeline tariff on BridgeTex, is about $1.90 a barrel. But to Corpus, it's about $1.10 a barrel. Now, this doesn't include the secondary market for pipeline space, which we know in the spot market that it's getting traded so that the actual cost being paid is less than the way that it's being traded.

But we do know that throughputs on BridgeTex and Longhorn are falling. Magellan has said that some participants are letting their long-term contracts expire to Magellan's East Houston Terminal.

Amanda H.: This is such a huge shift compared to pre-pandemic dynamics. In the first quarter of 2020, before we saw any major demand disruptions caused by Covid-19, the Midland-to-Houston spread was averaging about $2.25 per barrel, which is more than enough to cover those pipeline tariffs that we saw on BridgeTex and Longhorn. But we haven't seen anywhere near that level since the April 2020 crash, when NYMEX fell to below zero. I don't think it's really gonna be until demand fully returns after the pandemic before we start to see the Midland to Houston dynamics start to return to what we used to know.

Amanda S.: Yeah, and it could be even longer before we see that Midland-Houston spread widen. Because, you know, back prior to 2020, we saw a major bottleneck in West Texas because that additional pipeline capacity had not come online. So, when the spreads were wider, we didn't have as much capacity to bring the crude to the coast. But then, you know, with all the pipeline capacity expansions added, the market may have overcorrected for this problem, at least in the near term.

Permian production is expected to hit 4.59 million barrels per day in June. It's only up by about 300,000 barrels per day from a year ago. There's about 4.39 million barrels per day of pipeline capacity on the main pipelines to the Texas Gulf Coast from West Texas. So, about 2.22 million barrels per day to Houston and about 2.17 million barrels per day to Corpus. Now, that doesn't include, though, the volume going to Cushing and Midcontinent, it doesn't include like Brisbane Pipeline [SP], and it doesn't include the regional refinery demand. So, there's more capacity than is needed to take away that existing production right now.

Amanda H.: But if you were to look at the U.S. Gulf Coast alone, refinery runs right now are about 8.6 million barrels per day, according to the EIA. That's up 1.11 million barrels per day compared to a year ago. And then if you look on a broader perspective, Opec is now saying that demand growth is expected at 5.95 million barrels per day in 2021. And then energy watchdogs like the EIA and IEA both kind of agree they have both over 5 million barrels per day global demand growth for 2021. And the IEA, last week, said that it expects global crude oil demand to rise above 100 million barrels per day by the end of 2022.

So, my point being is if demand is going to continue increasing, as we are starting to see the early signs of, don't you think that it would be possible for U.S. producers to ramp up production rates and hit a new all-time high in order to fill this spare pipeline capacity?

Amanda S.: That is possible. And if demand, you know, continues to grow, then the production would likely respond to that. It could take a while, though, before it's more than the capacity that the pipelines can handle, maybe years. We do know that some of the producers have expressed that they're slower to react to higher prices than maybe they were in the past. There's the idea that, right now, Opec is restraining production. So those restraints are gonna decrease. We're gonna see more production from that come online globally.

As the production comes up right now, it's just not worth as much to move the crude because there are so many different ways to do it to move it from West Texas to the Gulf Coast. There's so much pipeline space to carry it. So, it seems that the WTI Midland discount to WTI Houston could stay narrow, even if the outright prices continue to be fairly high. Ultimately, though, mainstream companies are going to have to adjust, reflect this new normal, and attract customers if any new tariffs are issued.

ExxonMobil just released a new tariff on its Wink to Webster Pipeline from Midland to ECHO at 45 cents a barrel so that it's more closely aligned with the current trade patterns.

Amanda H.: I think it will be interesting to see if other key lines to Houston end up lowering their rates as well in order to reflect the new market patterns. But, Amanda, I think that you and I could probably go on about this, specifically, for at least another hour. So, for our listeners' sake, I think we should probably try to call it a day. So thank you to everyone that dialed in today. If you have any questions about what Amanda and I talked about, please do not hesitate to reach out to us at houstoncrude@argusmedia.com. We would love to hear from you.

For more in-depth daily coverage of U.S. crude oil markets, consider subscribing to Argus Americas Crude. You can find more information on this at www.argusmedia.com.

Thanks again for tuning in, and we look forward to you joining us on the next episode of Argus' The Crude Report.

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