One of the biggest stories in the North American onshore market this year has been the expanded investment and accelerating drilling activity in the Permian Basin, a mature oil-producing region in West Texas that has been revivified by hydraulic fracturing and horizontal drilling. (See Profitable Trend: Horizontal Drilling Activity Picks up in the Permian Basin.)
Oil-field services companies have benefited from rising demand, while producers have grown their output by leaps and bounds.
Although the Permian Basin already wears the crown as the top oil-producing unconventional basin in the US onshore market, this upsurge in activity has driven an impressive 18.7 percent increase in the region’s first-half oil output relative to year-ago levels.
This surge in production has exceeded the pace of pipeline development, depressing the price of West Texas Intermediate (WTI) and West Texas Sour (WTS) crude oils at the nearby hub in Midland, Texas relative to the WTI that trades in Cushing, Oklahoma, the delivery point for the crude-oil futures that trade on the New York Mercantile Exchange.
Source: Bloomberg, Energy & Income Advisor
In the second quarter of 2014, the price spread between WTI-Midland and WTI-Cushing averaged $7.57 per barrel; this differential has widened to an average of $11.61 per barrel thus far in the third quarter.
Accordingly, all signs point to a robust third quarter for Western Refining (NYSE: WNR), Delek US Holdings (NYSE: DLK) and Alon USA Partners LP (NYSE: ALDW).
The start-up of Magellan Midstream Partners LP (NYSE: MMP) and Occidental Petroleum Corp’s (NYSE: OXY) Bridgetex Pipeline, which can transport up to 300,000 barrels of oil per day to the Houston Ship Channel, should provide a modicum of relief in September.
That being said, management teams expect WTI-Midland crude oil prices to remain volatile, especially when regional refiners take capacity offline for maintenance and upgrades. In particular, unexpected turnarounds at refineries will widen the price gap between WTI-Midland and WTI-Cushing.
Elliott and Roger on Aug. 27, 2018
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