| NEW YORK/HOUSTON, April 12
NEW YORK/HOUSTON, April 12 Surging West Texas
oil production has pushed the value of the region's spot crude
to its lowest discount to the U.S. oil benchmark in nearly two
years, as an exuberant shale industry pumps more to take
advantage of higher prices and demand from refiners who have
seen supplies cut by top global producers.
OPEC and non-OPEC suppliers are working toward cuts of 1.8
million barrels per day, around 2 percent of the 92 million bpd
global market, as they try to bring down record oil inventories
and raise prices.
But supply cuts by exporters worldwide have given an
incentive and opportunity to U.S. shale producers to do the
opposite. They have sent rigs back into the field and are
working to boost output after more than a two-year industry
The Permian Basin is the biggest U.S. oil field and the most
prized U.S. locale for shale activity because of its strong
reserves and low production costs. But even as investors flock
to the region, some traders and analysts 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," said Dominic Haywood,
an analyst at Energy Aspects. "It's now falling towards levels
that's making it economical to ship on certain pipelines on a
Rising production has come before record U.S. oil stockpiles
have had time to drain, putting pressure on regional prices.
On Friday, even as benchmark U.S. crude futures
rebounded to a one-month settlement high of $52.24 a barrel,
cash traders sold West Texas oil - the type of crude pumped from
the Permian Basin - to one of its steepest discounts since April
Last week, WTI at Midland, Texas WTC-WTM for May fell to a
$1.65 a barrel discount to the U.S. benchmark. Four months ago,
it traded at a $1.05 a barrel premium to WTI. That means
producers in the Permian are effectively receiving nearly $3
less a barrel than they were at the start of the year.
While Midland prices rallied late last week due to Canadian
outages, the price remains relatively weak compared with recent
months or years.
"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," said Sarp Ozkan, manager of Energy Analytics for
OPEC's cuts are draining storage of oil at sea, in the
Caribbean and other parts of the world. But they are having
little impact on U.S. inventories as a wave of Permian output
keeps storage brimming. Permian output is expected to rise to
2.29 million bpd in April, up 15 percent from a year ago,
according to the U.S. Energy Information Administration.
The operating rig count in the region has doubled in a year,
and some producers who have left drilled wells uncompleted,
opting to leave the oil in the ground ready to pump when prices
rise, are turning on the spigots.
Producers had left a record number of wells unfinished in
Permian, but now appear to be whittling them down.
In the Delaware Basin, the number of wells drilled but
uncompleted outside the normal six-month spud-to-production
range, or the beginning to the end of drilling a well, known as
deferred completions, has fallen to 110 from 237 in the past six
months, according to Drillinginfo.
In the Midland Basin, the number of DUCs dropped to 94 from
163 in the same period.
Pipelines out of the region also show that the Houston area,
a destination for Midland crude, is flooded with other supply.
For example, Magellan Midstream Partners' BridgeTex
pipeline, which flows to Houston, ran at slightly more than
half-full at the end of March, according to energy information
provider Genscape. It costs about $4 a barrel to ship from
Colorado City, Texas, to Houston on that pipeline. That is
higher than the $2.75 to $3.00 a barrel differential between
Midland and Houston, making it not economical to send oil along
Total monitored stocks in West Texas hit a record in the
middle of March, Genscape added, but decreased slightly by the
end of the month.
To relieve swelling inventories in West Texas, regional oil
prices must fall relative to other markets to cover the cost of
transportation on pipelines that flow to places such as Houston,
or to make it economical to export the oil to international
destinations, according to Sandy Fielden, director of oil and
products research at Morningstar.
(Editing by Simon Webb and Matthew Lewis)