Viewpoint: WTI Midland supported by new pipeline demand

West Texas Intermediate (WTI) Midland's price remains supported relative to the US benchmark in Cushing, Oklahoma, as well as to WTI Houston, by new pipeline demand amid an ongoing deceleration in Permian basin production growth.

The WTI Midland price is averaging just under $1.05/bl over the US benchmark for January trade to date from a roughly $1/bl premium for December trade, the first month it had been around the $1/bl level since February 2018 trade. For June delivery, WTI Midland averaged a discount of around $3.30/bl.

WTI Midland is supported by rising pipeline capacity to the coast, which led the way to record US exports of 3.38mn b/d in October. In August, Plains' 670,000 Cactus 2 pipeline and Epic's 400,000 b/d pipeline started operating. The latest pipeline from west Texas is Phillips 66's 900,000 b/d Gray Oak to Corpus Christi, Texas, which started initial service in November.

In addition to supporting the WTI price in west Texas relative to the Cushing benchmark, the WTI Midland discount to Magellan's east Houston terminal has contracted to average almost $2.30/bl for January delivery to date. This is from a roughly $2.35/bl discount for December trade, and near $10.85/bl for June delivery when production gains were outstripping the then-existing outbound pipeline capacity.

This locational spread is now lower than the tariffs to ship crude between west Texas and Magellan's east Houston terminal. But the 440,000 b/d Bridgetex and 275,000 b/d Longhorn pipelines both have committed shippers that keep some volumes moving. By the same token, committed volumes on new pipelines to Corpus Christi are supportive of the Midland price going into the new year.

Although there is not an active spot price in Corpus Christi to compare with the WTI Midland price, in the waterborne market WTI fob Corpus Christi has been discounted to the fob Houston price.

On Cactus 2, committed shippers with a minimum of 300,000 b/d pay $1.05/bl to ship from Midland to Corpus Christi. Smaller volume committed shipper tariff rates range from $1.15-$2.25/bl, depending on the volume and whether the shipper has an acreage dedication.

The interim rate on the Epic pipeline from Midland to Corpus Christi is lower than many of the existing tariffs from west Texas to the coast at $1.35/bl. But in order to take advantage of that rate, a shipper would likely be buying for refinery supply or already be exporting crude.

The narrower price spread between west Texas and the coast has been encouraging some pipelines to lower their tariffs to become more competitive. Gray Oak's "accelerated commissioning service" tariff was lowered to $3.90/bl from $4.75/bl. This followed tariff cuts on Permian Express 2 and Cactus 2, among others.

Next year more pipeline demand is poised to continue supporting WTI in Midland. In the first quarter next year, Epic's new 600,000 b/d larger pipeline that will replace its smaller interim line is scheduled to come online. Additionally, the Gray Oak pipeline is expected to continue to ramp up to its 900,000 b/d full service. Gray Oak can also pick up Eagle Ford crude and has a connection to take up to 100,000 b/d of crude into Kinder Morgan's 300,000 b/d KMCC pipeline to Houston.

Permian production growth rates are declining. January Permian production is expected to be 4.74mn b/d, up by under 50,000 b/d from the December projection, according to US Energy Information Administration (EIA) data released in December. The EIA estimates show 2019 volumes rising by roughly 60,000 b/d each month, down from increases of over 90,000 b/d each month in 2018.

By Amanda Smith