Increasing crude oil production in the Permian basin of western Texas and eastern New Mexico is filling available pipeline capacity, putting modest downward pressure on West Texas Intermediate (WTI) crude oil priced at Midland, Texas compared with WTI at Cushing, Oklahoma. However, the Midland versus Cushing discount, which recently widened to more than $1 per barrel (b), is unlikely to be either as large or as persistent in 2017 as it was following the rapid increase in Permian production over 2010-14. Pipeline capacity expansions and other market changes now underway appear poised to facilitate the efficient disposition of higher volumes of Permian crude oil.Compared with other oil producing regions, the Permian has a large number of productive geological formations stacked in the same area, including the Wolfcamp, Bonespring, Spraberry, and Yeso-Glorieta formations. The Permian’s other favorable characteristics are in-region refining capacity, close proximity to large refining centers on the Gulf Coast, and existing pipeline infrastructure.Crude oil production in the Permian grew by 593,000 barrels per day (b/d) between January 2010 and January 2014, more than could be accommodated by in-region refinery capacity and pipeline capacity. This situation resulted in large price discounts at the crude gathering and transportation hub in Midland, Texas compared with Cushing, Oklahoma, indicating that the marginal barrel of crude oil was moving out of the region via a mode of transport more expensive than by pipeline. In 2014, WTI-Midland averaged a $6.94/b discount to WTI-Cushing, compared with a $1.68/b average discount the prior year. However, as new and expanded pipeline capacity was added in 2014 and 2015, WTI-Midland’s discount to WTI-Cushing narrowed, falling to an average of only $0.07/b in 2016 (Figure 1).
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