-Producers in the Permian region in West Texas generally receive
prices on oil closer to the WTI crude priced at Midland (in Texas)
rather than the domestic benchmark of WTI priced at Cushing
(Oklahoma). When media sources refer to U.S. oil prices, they
generally refer to WTI Cushing.
-WTI Midland and WTI Cushing usually trade close to par,
however, several times over the past two years the spread has blown
out, sometimes to up to $20/barrel.
-Spreads have tightened since the beginning of the year and
currently WTI Midland actually trades at a slight premium. The
gradual closing of the WTI Midland-Cushing spread over the past
several months has been a positive medium-term catalyst for
-As of May 31st, WTI Midland crude traded $0.15/barrel below WTI
Cushing crude, unchanged from the prior week.
Oil and gas producers in the Permian Basin in West Texas suffer
when the price of WTI (West Texas Intermediate) crude priced in
Midland, Texas (WTI Midland) decreases relative to the domestic
benchmark crude of WTI priced at Cushing, Oklahoma (WTI Cushing).
Note that WTI Cushing is generally accepted as the U.S. benchmark
for crude prices as it is a major storage and transportation hub
Permian producers suffer when WTI Midland crude decreases
relative to WTI Cushing crude as the price they realize on their
oil is generally closer to the Midland crude price, and when
Midland crude prices decrease, they receive less revenue from the
oil they produce. Some companies which this affects includes Range
), Laredo Petroleum (
), Concho Resources (
), and EOG Resources (
Midland crude traded as much as $14/barrel under WTI crude at
the beginning of this year, but narrowed throughout 1Q13. Recently,
WTI Midland has actually traded at a slight premium compared to WTI
Cushing crude at points. Over the week ended May 31st, Midland
traded up to $0.15/barrel above WTI, though closed the week
$0.15/barrel below WTI.
Note that Midland crude has historically traded in line with
WTI, as seen in the above graph. However, recently Permian
production has ramped up significantly. Consequently, any
disruption in takeaway capacity, which had been tight, caused
spreads to blow out. For instance, if a pipeline that normally
takes crude out of the Permian goes down for some reason, the crude
must be redirected to other pipelines or find other transport. If
these other options are fully utilized, it could cause a temporary
glut of Permian crude, pushing prices downward. Additionally,
takeaway capacity in the Permian had lagged the growth in
production for some time, which caused a price divergence between
WTI Midland and WTI Cushing. Companies in the Permian generally
receive a price closer to WTI Midland crude than WTI Cushing, so
this price divergence hit revenues of Permian producers.
As mentioned, Midland has traded at points at a slight premium
to Cushing as infrastructure, such as Magellan Midstream Partners'
) Longhorn pipeline, have started service and helped to alleviate
bottlenecks in the area. Additionally, Sunoco Logistics Partners
(SXL) plans to start two projects which will increase crude
takeaway service from the Permian in 2Q13.
The spread between Midland and Cushing crude was unchanged over
the past week, which was a neutral short-term indicator. Midland
crude's increase in price relative to Cushing over the past several
months has been a positive medium-term catalyst for Permian names.
However, if takeaway capacity becomes tight, disruptions can have
the effect of causing the spread to widen significantly again. More
capacity coming online, such as the reversal of the Longhorn
Pipeline, can mitigate these risks. Investors holding names with
Permian exposure, such as CXO, LPI, RRC, and EOG, may find it
prudent to monitor the Midland-WTI spread. Additionally, several
names with Permian exposure can be found in the Vanguard Energy ETF
Copyright (C) 2014 MTNewswires.com. All rights reserved. Unauthorized reproduction is strictly prohibited.