How fast can US pipelines get built? That question has been asked this autumn at conferences around the world.
It’s no wonder. The Permian Basin has arguably become the global swing supplier. Production has soared, helping offset supply declines from OPEC.
The one thing that could stunt growth is the lack of pipeline takeaway capacity. Several big projects are under construction, but not expected to be finished for another year.
It was therefore welcome news when the market learned about a Plains All American (PAA) pipeline expected to be operational by October 31.
Plains All American extended the Sunrise pipeline from Colorado City, Texas to Wichita Falls, Texas. The original section ran from Midland, Texas to Colorado City.
A total of 500,000 barrels per day can flow on the Sunrise pipeline from Midland to Wichita Falls at full capacity.
Pipeline data: US Energy Information Administration
Image credit: Lauren Baker/Ursa
From Wichita Falls, there are connections to Cushing, Oklahoma. Plains All American can utilize 120,000 bpd on its Basin Pipeline plus 100,000 bpd from Valero-owned pipelines, PAA president, Harry Pefanis, told analysts recently.
That only adds up to 220,000 bpd of available pipeline capacity. What about the remaining 280,000 bpd capable of reaching Wichita Falls?
Trucks can sometimes be used in these types of situations. But trucks aren’t an option here because refineries aren’t close enough to Wichita Falls to make the economics work, Pefanis said.
The Wichita Falls-Cushing bottleneck should eventually see relief as even more infrastructure gets built.
Even before then, the Sunrise expansion will increase the pipeline capacity out of the Permian Basin.
That should help ease the supply glut in the region. Crude inventories in Midland rose sharply from July to September and then leveled off in October, according to Ursa calculations.
There was an immediate market reaction to news reports about Sunrise’s start date. Prices for WTI at Midland strengthened relative to Cushing and Houston.
Greater flows leaving the Permian also place upward pressure on Cushing stocks, which have been building of late. Inventories have increased five straight weeks, according to Ursa measurements.
This has caused NYMEX crude futures to weaken. The spread between front-month and second-month contracts flipped to contango, an indication of ample supply.
A slowdown in refinery activity, which is typical for this time of year, has also been responsible for more oil ending up in storage.
Pipelines link Cushing with refineries in the Midwest and Gulf Coast. The number of units taken offline in the Midwest for planned maintenance has been large, while the Gulf Coast has had a light turnaround season.
Source: US Energy Information Administration
Another factor to consider is US exports, which at first glance look poised for growth. US sanctions against Iran, effective November 4, should benefit major producers capable of shipping greater quantities to compensate for lost Iranian supply.
Yet the opportunity won’t be so great if sanctions prove underwhelming.
The White House is granting waivers to eight countries allowing them to continue some purchases of Iranian crude for a six-month period.
There’s also the issue of crude type. US exports mostly light, sweet crude, which doesn’t make a good substitute for Iran’s heavier, sour barrels.
Another variable is the health of the global economy. Oil prices plunged alongside equities in October over concerns about the US-China trade war.
An economic downturn would sap global demand and hurt exports. The effect would be visible along the US Gulf Coast where exports mostly leave from.
But the impact won’t end there. It would be felt further away in Cushing and Midland. That is a point worth pondering further.
The three corners of this triangle -- Cushing, Houston and Midland – form a loop with each stage of the supply chain represented (production, storage, refining and exports).
You can think of it as a living creature. Every part is connected. And understanding how this system works is crucial to understanding the global oil market.
Stay tuned as we delve deeper into this topic in future blogs.