Trains will roll all month out of the Permian Basin, the largest onshore U.S. oil field, as production outpaces pipeline capacity and a refinery outage saps demand.
Crude from the basin in West Texas has slipped to discounts not seen since March, making the decision to move crude by rail easier for producers. A Texas refinery that uses the region’s oil may be offline for five weeks.
“What we’re hearing right now is the forecast for at least through July, volumes are going to continue to move out of the region by rail,” Bruce Carswell, the West Texas operations manager for Iowa Pacific Holdings LLC, a short-line operator that connects terminals to longer tracks.
Carswell said the company moves 70,000 to 200,000 barrels a week of crude out of the Permian to Union Pacific Corp. (UNP:US) and BNSF Railway Co. routes to the Gulf Coast or California.
West Texas Sour crude priced in Midland, Texas, fell yesterday by $2.75 a barrel to a discount of $11.50 to West Texas Intermediate crude in Cushing, Oklahoma, the delivery point for U.S. oil futures, according to data compiled by Bloomberg. It’s the largest difference since March 20 between the two oil hubs separated by 500 miles.
Phillips 66 (PSX:US) plans to shut most of its 146,000-barrel-a-day refinery in Borger, Texas, for as long as 35 days after it was unable to recover from a power failure, according to a report from Energy News Today. The refinery processes some WTS, a medium-density, high-sulfur crude. Phillips declined to comment on the report when contacted by Bloomberg.
WTS historically traded at a discount of a few dollars to WTI to account for quality differences and the cost of transportation from Midland to Cushing. The discount widened in 2012 and again this year as booming production overwhelmed takeaway capacity.
Output in the Permian has jumped by 79 percent since December 2009 as producers have used horizontal drilling and hydraulic fracturing to blast crude out of previously inaccessible underground shale rock. The basin now produces about 1.57 million barrels a day, Energy Information Administration data show.
Pipeline operators have struggled to keep pace. Magellan Midstream Partners LP (MMP:US) and Sunoco Logistics Partners LP (SXL:US) have added 435,000 barrels a day of capacity out of the region in recent years. Total Permian takeaway capacity is 1.27 million barrels a day, according to Pioneer Natural Resources Co. (PXD:US)’s July investor presentation.
Magellan and Occidental Petroleum Corp. (OXY:US) expect to begin commissioning the 300,000-barrel-a-day BridgeTex pipeline in the third quarter. Sunoco and Plains All America Pipeline LP (PAA:US) will add 400,000 barrels a day of takeaway capacity in 2015.
The infrastructure bottlenecks created gluts that drove down prices in West Texas, making more expensive rail shipments economical. The price of light, sweet WTI in Midland is $12.70 below Light Louisiana Sweet crude in St. James, Louisiana, where NuStar Energy LP (NS:US) and Plains All America Pipeline LP operate rail off-loading facilities. It’s the biggest discount since May 22.
The difference between the two crudes reached a record $42 in late 2012, then narrowed to $1.40 in September. Rail shipments dried up during the fall and winter, and many companies moved their fleets to other areas, such as the Williston Basin in North Dakota, Iowa Pacific’s Carswell said.
Companies returned fleets in early spring and shipments have been steady since, he said. Growth in output from the Permian is such that Carswell said he wouldn’t be surprised if demand for rail shipments rebounds after a lull when Magellan starts BridgeTex.
“The forward outlook is stronger than everyone expected,” he said.
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