Reliant Wealth Planning | Louisville, KY

Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Permian Oil Diffs Blow Out; How Wide Can They Go and What are the Fixes?
May 21, 2018

We've long-modeled massive production growth from the Permian, but it currently appears to be too strong, too fast…not for global oil prices, but rather for the infrastructure supporting the Permian. As we discussed in late-February, we had expected Permian production to overwhelm regional refining and pipeline takeaway capacity as soon as early-3Q18, but the ''blow out'' in regional price differentials in the Permian at the Midland hub versus Cushing, Gulf Coast, and global benchmarks has already materialized.

In fact, due to 1) faster than previously expected Permian production growth, 2) lack of adequate pipeline takeaway capacity, 3) delays in anticipated new pipeline capacity until late-2019, and 4) difficulties in ramping rail/trucking as the ''relief valve'' for Permian crude, we now forecast wider for longer Permian oil price differentials. Overall, it doesn't seem much can slow the Permian down in the short-run given operator outlooks, drilling programs, and completion schedules. As such, we see confirmation that Permian growth is likely to massively outpace local demand and takeaway capacity in the near-term. We now forecast prices at the Midland hub (Permian pricing point) will be discounted to both WTI-Cushing ($10+/Bbl through most of 2019) and Gulf Coast & International markets ($20+/Bbl to Brent through most of 2019). In today's Stat, we: 1) discuss what drove differentials this wide, this soon, 2) recalibrate our production outlook for 2018-2021 versus expected takeaway capacity, 3) along with our transportation research team, review the options for what looks like an increasingly-likely scenario of ''stranded'' Permian barrels, and 4) discuss the winners and losers from wider Permian oil price discounts. Indeed, while there are several winners (e.g., refining and midstream operators), it's important to note that not all producers in the Permian are ''losing'' due to wider diffs, as many have firm pipeline capacity and/or basis differential hedges (we estimate this covers 2/3+ of production) - meaning the wider diff likely won't dramatically impact cash flows and operator activity levels.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

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