Lack of Infrastructure in Permian Basin Contributing to Price Differences
Current pipeline infrastructure throughout the Permian Basin is insufficient in handling the recently increased production of crude oil in the area. Prices have fallen as a result of this inability to transport the crude product to refineries. Although the price gap has increased between Western Texas crude and that from Cushing, Oklahoma in recent years, new developments have now caused it to jump significantly. However, several infrastructure projects are in the process of being completed, meaning the gap should decrease before long.
Recent reports conducted by the EIA peg August oil production from the area at nearly 1.7 million bbl/d. This is an increase of approximately 300,000 bbl/d from 12 months ago. Recent outages at refineries located around the Permian Basin and the Texas Gulf Coast has thus lowered the demand for the area’s crude production, causing the downward pressure on price.
There is some precedence for the drop. In 2012, barrel prices reached what at the time was a record low due to an exceeded pipeline takeaway capacity. As a solution, a section of the Longhorn pipeline was re-purposed in order to move the oil from the basin to Houston. In August, WTI pricing at the basin fell to $17.50 less per barrel compared to Cushing, which has set the new record. This may prompt similar changes to the Longhorn Pipeline solution of 2012. In fact, many expansions are already underway, with the first expected to be operational very soon. By early 2015, new infrastructure will allow the basin to supply crude as far south as Corpus Christi, thus helping to eliminate the current issues and price gap.