Permian Basin output boost pressures regional prices

Cash traders selling Permian Basin crude at steep discounts

Booming West Texas oil production has resulted in a drop in the value of the area’s spot crude to its lowest discount to the US oil benchmark in nearly two years.

Shale producers in the Permian are frantically working to take advantage of higher prices and refiners’ demand as OPEC cuts impact their supply.

The OPEC supply cuts have resulted in higher commodity prices and increased activity in the Permian. Producers are sending rigs into the field, looking to boost output after the three-year drop in oil prices dealt a significant blow to the industry.

And investors are flocking to the Permian because it has strong reserves and low production costs.  Recent US Energy Information Administration data shows Permian output is expected to increase to 2.29 million b/d this month, up 15 per cent from this time last year.

“Right now, the Permian is obviously the hottest place to drill. There’s quite a bit of expansion in production we expect from the area,” Sarp Ozkan, manager of Energy Analytics for Drillinginfo told Reuters.

But some analysts are wary and caution that activity may be moving too fast.

“Aggressive Permian production growth alongside regional refinery outages and weaker export demand for shale crude has forced heavy discounts for Midland crude,” Dominic Haywood, an analyst at Energy Aspects told Reuters. “It’s now falling towards levels that’s making it economical to ship on certain pipelines on a spot basis.”

One of the problems is that the increased production has not allowed US crude inventory stocks to drop, resulting in pressure on regional prices.

Reuters reports that last week, cash traders sold West Texas oil at one of its steepest discount since April, 2015, despite benchmark US crude futures rebounding to a one-month settlement high of $52.24.

WTI at Midland fell to a $1.65/barrel discount to the US benchmark.  Four months ago, it traded at a $1.05/barrel premium to WTI.  All told, Permian producers are effectively receiving nearly $3/barrel less than they were at the beginning of the year.

Recent outages in Alberta oilsands facilities have led to a small rally in Midland prices, but the price remains relatively weak compared to recent months or years.

While OPEC’s supply cut pact is draining oil storage at sea in the Caribbean and other parts of the world, the boost in Permian production means OPEC’s cuts have had little impact on US inventories.

The Permian rig count has doubled over last year, with some producers leaving drilled wells uncompleted, opting to leave the oil in the ground until prices rise.

According to a report by Reuters, Permian producers have left a record number of wells unfinished, but recently have begun pumping those wells.

Drillinginfo says the number of deferred completions in the Delaware Basin has fallen to 110 from 237 in the past six month. In the Midland Basin, the number of DUC’s fell from 163 to 94 in the same period.

Producers are also struggling with an oversupply of crude in the Houston area, which is the destination for Midland crude.  Total West Texas monitored stocks hit a record-high in the middle of March, according to Genscape, but have recently dipped.

Sandy Fielden, director of oil and products research at Morningstar told Reuters that in order to reduce inventories in West Texas, regional oil prices must fall relative to other markets to cover the cost of transporting crude via pipelines to markets like Houston or international destinations.