• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 12 hours How Far Have We Really Gotten With Alternative Energy
  • 17 hours Bad news for e-cars keeps coming
  • 9 days For those of you who are full of __it.
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

Permian Bottleneck Could Impact Global Oil Markets


The Permian basin is driving U.S. shale growth, with expectations that the basin will add enormous volumes this year, keeping the oil market well-supplied. But the Permian’s pipeline network is already filling up, forcing steep discounts for oil, and threatening to derail the aggressive growth projections for the region.

The EIA predicts the Permian will hit 3.156 million barrels per day (mb/d) of output in April, an increase of 80,000 bpd from March, and up a shocking 850,000 bpd from a year ago. Shale E&Ps and the oil majors are pouring in billions of dollars into the region, and two out of every three rigs the industry is adding is going into the Permian.

But the shale basin is getting crowded, which not only means skyrocketing prices for land and a search for opportunities along the periphery, but also rapidly shrinking availability on the Permian’s pipeline network. “As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast,” John Zanner, energy analyst for RBN Energy, told Reuters.

Oil market analysts knew that new pipeline capacity would be necessary in order to move all of the oil out of the Permian. But few expected the region to run out of pipeline space so quickly.

“At the end of 2017, there was just 160 kb/d of line space available out of Western Texas. This small surplus is likely to turn into a deficit in the second half of 2018,” the IEA wrote in its March Oil Market Report. “The pipeline gap could widen further until mid-2019, in turn reducing the price of WTI Midland relative to Cushing.”

Related: Oil Prices Poised To Rise As Cycle Comes To An End

“Other bottlenecks, such as shortages of sand and labour, as well as mounting demands for investor returns, could also slow growth, but most likely beyond 2018. For now, US producers continue to ramp up activity,” the IEA wrote in its March Oil Market Report.

The IEA was spot on, except that the bottleneck the agency predicted is already starting to materialize. Even late last month when the IEA warned about pipeline issues, the thinking was that bottlenecks would start to form in mid-2018.

But according to Genscape, and reported on by Reuters, pipeline utilization in the Permian has jumped to 96 percent over the past month. Genscape says the Permian has 3.175 mb/d of pipeline, rail and local refining capacity combined. That’s a problem given that the EIA sees production jumping to 3.156 mb/d in April.

That essentially means the pipelines are already close to being completely full, and the prices for oil from the Permian are starting to reflect that problem. Canadian oil producers have been suffering from painful discounts for their oil because of a lack of pipeline capacity, but now the Permian is running into a similar problem. On Wednesday, Midland light sweet crude traded at a $8-per-barrel discount relative to WTI.

“What the spreads are telling you is that these pipelines are full going to the Gulf Coast,” Kendrick Rhea at energy consultancy East Daley Capital, told Reuters. The earliest possible relief will come from the Permian Express 3 pipeline, which could add 200,000 bpd of capacity by the end of this year.

This is a serious problem for Permian drillers, who could be forced to slow growth or even shut down some operations if things get worse. That could have a significant impact on earnings.

Related: Are We Sleepwalking Into The Next Oil Crisis?

But there are broader ramifications for the global oil market. The assumption that the oil market would be well-supplied not only this year, but for years to come, is largely predicated on aggressive growth from U.S. shale generally, but also the Permian in particular. If Permian growth comes to a standstill this year, that will completely upend conventional wisdom about adequate supply.


“Two opposing forces in the Americas dominate our medium term forecast. In the early years, record-smashing US supply far outweighs collapsing Venezuelan capacity, keeping the world adequately supplied,” the IEA wrote in its Oil 2018 report. The agency expects the U.S. to add 3.7 mb/d over the next five years.

The IEA warned about a supply problem in the 2020s. But if the Permian does not add the enormous volumes that everybody thinks it will, the supply problems could arrive sooner than expected. To be sure, a series of pipeline projects could resolve the bottleneck, but several of them are not expected to come online until mid-to-late 2019.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • JACK MA on April 08 2018 said:
    Just read that their is a shortage of truckers with the roper training and licenses to drive the Permian oil out and the routes sometimes are 50 miles of poorly maintained dirt roads where the driver cannot travel any faster than 5 to 10 miles and hour. The stated salary was around 110k per year. Most have found new jobs now in other industries so the marginal cost of labor is going up far beyond the marginal revenue of labor, which means oil prices will probably have to rise. IMHO
  • John Brown on April 08 2018 said:
    What this tells you is production has outstripped the most optimistic projections & will continue. If there’s money to be made they’ll figure it out. With WTI around $65 & everyone going all out to keep it there or manipulate it upward now is the time for the USA to produce & get a good price. Oil simply isn’t a scarce resource any longer & prices in the $60s are dependent on OPEC/Russia being willing to idle more & more production as US & Global production soars & renewables getting cheaper by the month.

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News