Price Difference between Midland and Cushing Crudes is at Record High

A $21 difference between Midland and Cushing’s crude oil price per barrel is the highest gap ever as the Permian Basin’s oil output far surpasses the pipeline infrastructure used  to transport it, according to the latest reports.

In Cushing, the current oil price for the U.S. benchmark is around $87 a barrel while, in Midland, it is $65 a barrel. The difference between the two was only $3 per barrel in the month of October.

According to Ed Hirs, economics professor at the University of Houston, each barrel of crude produced from the Permian is limited in its marketability by pipeline availability. He said that trucking is the only means to mobilize this oil, and doing so from Cushing to the markets along the Gulf Coast entails a charge of about $20 a barrel.

The glut in WTI implies that buyers of oil expect to spend less. Even though Cushing bottlenecks have caused the current oil price of WTI to be lower than that of Brent, congestion is greater in the U.S. benchmark. Delays in startups for the Phillips 66  Borger refinery in the Texas panhandle have also been a factor in the fall of Midland prices, according to a report from Wells Fargo.

The basin’s increasing output, downtime at other refineries plus efforts to lower inventories to cut taxes by the end of the year are all contributing to falling demand for WTI in Midland. However, the discount in the Midland hub is expected to fall within a couple of weeks when the Borger plant restarts its operation.

The difference in the crude oil prices per barrel is also anticipated to slim down when more pipeline projects are brought online along the Gulf Coast in quarter one of the coming year. Some of these planned projects will increase pipeline capacity throughout the state of Texas.

The Permian Express pipeline, run by Sunoco Logistics, is anticipated to connect Houston and Wichita Falls in early 2013.

The reversal of the Longhorn Pipeline, run by Magellan Midstream, is also set to be operational in the early parts of the coming year. The improved pipeline will run to Houston from El Paso, instead of the reverse, and will transport crude rather than refined commodities. Its expected throughput capacity is 135,000 barrels a day.

Occidental Petroleum and Magellan are also eyeing for BrudeTex pipeline’s completion in 2014, which will run to Houston from the Permian Basin, a distance of 400 miles, and transmit a daily capacity of 278,000 barrels.

More pipelines are anticipated to bring the crude oil price per barrel of Midland closer to that of Cushing, erasing the majority, if not the entire difference in prices.