The gap in prices for U.S. shale oil from West Texas compared to Houston has widened significantly in the past two months. This shift comes as pipeline capacity for moving crude from the Permian Basin to the Gulf Coast export hubs gets increasingly tight, according to recent pricing data.
With record oil production coming from the Permian Basin, which straddles Texas and New Mexico, the demand for this light sweet crude has been soaring. The shortage of this type of crude from Libya, an OPEC member, has only fueled the need further, leading to a significant increase in the price gap—almost triple compared to last year’s average.
Last month, the price of Permian-quality crude delivered to the Magellan East Houston (MEH) terminal, the main price benchmark along the Gulf Coast, was trading about 63 cents a barrel higher than the same crude in Midland, the heart of U.S. shale production, according to Argus pricing service. At one point in September, that difference spiked to 74 cents per barrel, a big jump from the average 22-cent gap we saw last year. Earlier in May, it even briefly hit 80 cents due to some pipeline maintenance from the Permian to the Gulf Coast.
“The pipelines to Corpus Christi are pretty much maxed out, and those leading to Houston are getting filled up quickly,” said Brian Freed, CEO of EPIC Midstream, a company that operates oil pipelines and storage facilities. “You’ll continue to see this gap widen,” he added.
Data from consultancy Wood Mackenzie shows that in September, pipelines running from West Texas to the U.S. export hub in Corpus Christi were at about 97% capacity, and those heading to Houston were about 73% full. That’s an increase from last year’s average of 91% and 63%, respectively, for those same routes.
Dylan White, an analyst with Wood Mackenzie, pointed out that the rising production of Texas shale oil this year has quickly eaten up the available pipeline space between the Permian and Houston. Though there is the option to divert oil to the Cushing, Oklahoma storage hub and then ship it from there to the Gulf Coast, it’s usually not the first choice for producers due to the added costs and complexity.
“The market is getting nervous with the pipelines to Corpus Christi at capacity, and Houston is really the only remaining spare capacity to get Midland crude to waterborne markets,” said Jeremy Irwin, senior oil market analyst at Energy Aspects.
Adding to the recent spike in the spread was a temporary halt in oil exports from major Libyan ports in September, which drove demand for U.S. crude. Midland’s light, sweet crude has been a popular substitute for Libyan oil, traders said. However, the Libyan export issues have since subsided.
There may be some relief in sight for these constraints. Enbridge is planning to expand capacity by 120,000 barrels per day by 2026, with about 80,000 barrels per day expected to become available by April next year. Additionally, a pipeline that was converted to carry gas liquids last year is set to revert to crude oil transportation by 2025.
For now, though, production from the Permian Basin keeps climbing. The U.S. government expects Permian output to grow by about 360,000 barrels per day this year, bringing it to around 6.27 million barrels per day. And with Exxon Mobil and Chevron recently outlining plans to increase their shale production next year, the need for pipeline space will only grow.
