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West Texas oil production outgrowing pipeline capacity

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Oil production in West Texas is about to outgrow pipeline capacity, a combination that knocked down crude prices in the region three years ago.

West Texas Intermediate crude at Midland, Texas, the heart of the Permian Basin, sank this month to the lowest level since September. It’s the weakest for this time of year since 2014, according to data compiled by Bloomberg. That year, the discount versus the same oil in Cushing, Oklahoma, the U.S. benchmark, plunged to $21 in August as the shale boom flooded the region with oil.

Permian output is expected to rise to 2.65 million barrels a day in December, said William Foiles, an oil analyst with Bloomberg Intelligence. In comparison, takeaway capacity in the region may only reach 2.54 million barrels a day by end of this year, according to Bloomberg Intelligence pipeline analyst Michael Kay.

While Midland prices probably won’t reach 2014 levels, they could fall to $5 a barrel below WTI at Cushing later this year, “because of tightness in takeaway capacity in the Permian,” Paul Grigel, Denver-based analyst at Macquarie Capital USA Inc., said by phone.

Pipeline operators are looking to increase capacity on existing lines to meet the increased output. A plan by Enterprise Products Partners, LP to start up a new Midland to Sealy, Texas, pipeline is expected to begin service in the fourth quarter, but its full capacity of 450,000 barrels a day would only be available in early 2018, Kay said, referring to an Enterprise presentation.

“From the looks of it there could be several thousand barrels a day worth of midstream capacity shortages by the end of the year,” Mara Roberts, a New York-based analyst at BMI Research, said in a phone interview. “The rate of growth in takeaway pipeline capacity is going to be where the bottleneck is, and that will choke access to the market for producers.”

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Written by Rob Gavin

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