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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Permian Bottleneck Provides Huge Opportunity For Oil Traders

Oil production in the fastest-growing U.S. shale play, the Permian, continues to boom, while takeaway capacity has not kept up. Pipeline availability issues have led to a major discount on West-Texas crude.

A growing amount of Midland crude oil gets stranded as producers face bottlenecks shipping the oil to the Gulf Coast refineries and export terminals. So thin has become pipeline capacity that the spot price of Midland, Texas, crude was trading early this week at a discount of nearly $16 a barrel to the grade in Houston.

This discount is now large enough to cover the cost of sending Midland crude oil by rail, as crude by rail typically costs $6 to $8 a barrel. Shipping Permian oil in railcars to Houston would in theory bring oil traders around $8 a barrel profit, Bloomberg’s Sheela Tobben writes.

There hasn’t been a surge in crude-by-rail activity, but inquiries about this option have increased, Dan Lester, V.P. for commercial operations at transport service provider Watco Cos—which operates three short-line railroads in West Texas, including two directly serving the Permian—told Bloomberg.

The discount has blown out so wide only recently, so there’s a reason why operators have not started to ship crude by rail in growing amounts yet.

But apart from the obvious price incentive for shippers and traders, crude-by-rail in the Permian is constrained by the competition for railcars that transport frack sand, competition for locomotives, and competition for tracks.  Related: Goldman: Oil Prices To Hit $82.50 By The Summer

“The vast majority of the oilfield rail infrastructure is designed for sand,” Joseph Triepke, founder of oilfield research firm Infill Thinking, tells Bloomberg.

Rail service giants Union Pacific and Burlington Northern Santa Fe (BNSF) are shipping frack sand in the Permian, which is their leading destination for frack sand moved by rail.

They could provide the long-haul crude-by-rail shipment to the customers, but the Permian would also need shorter railroads to get the oil from the oil wells to the long-haul tracks.

“BNSF is moving modest volumes today from the Permian basin, this is not new. As always, BNSF will respond to market developments as rail becomes an option for shippers in and around the basin,” company spokeswoman Amy Casas told Bloomberg in an email.  

Some petroleum shippers are expanding crude-by-rail capacity.

Earlier this month, Murex LLC and Cetane Energy agreed to capacity expansion that will more than double the existing throughput of the Cetane crude oil trans-loading facility in Carlsbad, New Mexico, serving the Permian and Delaware Basins. The expansion will allow the facility to load up to 110 cars in one day, or 75,000 bpd.

“Murex and Cetane have worked closely with the BNSF Railway and Southwest Railroad to increase capacity of the Cetane crude oil trans-loading facility to one unit-train per day,” said Robert C. Wright, President of Murex. 

Related: Who Was Buying Iranian Oil And What Happens Next?

Amid constrained pipeline capacity, crude-by-rail would be the more preferred option for Permian oil producers, provided that the WTI Midland discount remains much wider than the rail costs of $6-$8 a barrel, S&P Global Platts editors Ashok Dutta and Mary Hogan said in early April. The other option—trucking—costs on average three times more to move a barrel of oil than doing so by rail, Dutta said.

In terms of producers’ reaction to the wide Midland discount, Dutta believes that “Shut in is not an option even if their crude is not being discounted. Shutting in of wells is not an easy option in the shale industry as the rate of decline is very steep and also some of the new wells may be jeopardized. The older wells may still be able to ramp up to previous capacity. But the last thing we want will be orphan wells in the Permian.”  

As limited takeaway capacity pushes down WTI Midland prices, producers and shippers considering crude-by-rail face competition from the railcars shipping in the sand for pumping those barrels of oil that they want to move out of the Permian.

By Tsvetana Paraskova for Oilprice.com

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  • Karl Milhon on May 13 2018 said:
    There are different kinds of articles that can be written about oil/crude. One is the macro type where you discuss pricing long term, mid term or short term and the variables in play that impact those prices. So, if you look at the macro picture, and you look at the Permian play as a discrete variable, where does an article like this impact your understanding? I'd say it is in the short to mid-term. It is descriptive of the production processes as they impact the macro processes of production from an input and output standpoint within one area of world production but with that area having a degree of influence on world pricing.

    This is the other type of article is where you take one part of the macro picture and you describe it in detail in terms of the inputs, outputs. Did you know you can attribute values to the various sub-components of all of this and plug it into a predictive program? I know similar but more simple things have been done with algorithms but they are "dumb" reactive and not predictive in nature. If you want an advantage, gain the ability to extrapolate into the future with a degree of accuracy. You have to put a human or maybe AI in 10 years into the equation to make it predictive. IF, someone wanted to completely focus on this or any area, for that matter, you could predict AND influence the overall direction of a market. Oil lends itself more to this than most areas of the economy because it is "old school" industry and the inputs and outputs are big chunky discrete and describable.

    The core variables that would de-stablize the predictive value are intrinsically human. This includes things like Trumps decision on Iran, or let's say the Iraq/Kurdish production and "what would happen if?" Each of these things can be given a value and even a second value based upon volatility of a given situation. For example, Canadian/American production might have a very low volatility value while other areas might have much higher values. You can look at details like investment into infrastructure within defined "plays" etc. The more complex you make the program, the more stable it is, but the complexity itself must be built upon robust models or stability is impacted. As new inputs come into play, you must analyze them for inclusion into the model. A long term example would be fracking technology. If you looked at it as a discrete qualitative improvement 10 years ago you could begin to include it, An emerging technology is the Japanese Methane Hydrate program. Get experts on it, begin to understand it within the context of the macro environment and attribute value to it. As time goes by, tech like this would either increase in impact on the model or decrease depending upon success.

    I'm thinking or more wondering how much of this kind of thing the Saudi's do? Or anyone else. Oh, of course you cannot fully incorporate "black swan" events into the model but you can to a degree.

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