Viewpoint: WTI Midland weathers line outage

Muted market reaction to the early July shutdown of Magellan Midstream Partners' 225,000 b/d Longhorn pipeline shows there is relatively little industry concern over transportation constraints out of the Permian basin.

For many months shippers have been eyeing persistently rising Permian production and the timetable for new takeaway projects. This includes Enterprise Products Partners' 450,000 b/d Midland-to-Sealy pipeline, whose full-service date earlier this month slipped to the second quarter next year from "early 2018".

When Magellan disclosed on 13 July that a maintenance accident on the Longhorn pipeline caused a 1,200 bl leak near Bastrop, southeast of Austin, August WTI crude at Midland, Texas, ticked down by 15¢/bl to trade at discounts as wide as $1.50/bl relative to the WTI benchmark at Cushing, Oklahoma.

But WTI Midland recovered by the end of the day, and the volume-weighted average differential weakened by just 6¢/bl, while WTI Houston rose by only 5¢/bl, despite the disruption.

For now, at least, the other Gulf coast takeaway options for Permian crude — like the 400,000 b/d Magellan/Plains All American Pipeline to Houston, Plains' 250,000 b/d Cactus line to Gardendale with access to Corpus Christi, and Energy Transfer Partners' 350,000 b/d Permian Express system to Nederland in far southeast Texas — remain sufficient.

Also helping to calm the market is the moderate storage levels in the region. Traders said the leak being an obvious and identifiable physical accident rather than an integrity failure made unlikely a long-term shutdown that probably would have roiled markets.

Permian production has crossed the 2.4mn b/d mark for the first time and is on an approximately 65,000 b/d per month climb as the rig count has more than doubled since last year to nearly 400. More incremental pipeline capacity is planned over the next several months before Midland-to-Sealy comes on stream, such as expansions on the Cactus and Permian Express systems as well as the Basin system that moves crude to Cushing.

How well that new capacity keeps up with surging rig counts and commensurate production over the next year will be key to determining whether Midland WTI becomes constrained and discounts grow, as they did earlier this decade.

Another outage in a few months could have a more tangible impact on crude prices out of west Texas. And if new pipeline capacity is delayed, it might not even take an accident.