Permian Operators Facing Huge Challenges -- April 18, 2018

WTI is surging (?) -- it might hit $70 this week. But a reminder, from RBN Energy:

Price differentials in the Permian Basin are widening at a rapid pace.

The discount for Midland crude to West Texas Intermediate (WTI) at Cushing has widened by over $4/bbl since the beginning of March and the discount to Magellan East Houston (MEH) crude was over $7/bbl yesterday (April 3, 2018).

Permian production is increasing at a breakneck pace as new players are entering the scene. Private equity-backed exploration and production companies (E&Ps) are no longer just acquiring and flipping acreage, as they are being forced to prove their assets are profitable and can generate a return on investment.

The combination of large drilling plans from the majors and new production from these smaller operators — with no new pipeline takeaway capacity in sight — has sent Permian crude pricing into a tailspin. Today, we begin a new series on the recent slide in Permian prices, how new producer strategies are contributing to it, and what it means for pipeline space, trucking and midstream infrastructure.

We saw the same thing in the Bakken during the boom.

Remember: a lot of the operators paid a huge amount of money to get into the Permian.

From Platts this week:

Pipeline capacity is currently constrained out of the Permian, reflected in wide price discounts for Midland WTI crude. Midland WTI is averaging at a $4.33/b discount to Cushing WTI so far in April, compared to a 93 cents/b premium in January, S&P Global Platts data shows.

WTI Midland moved higher on the news of additional takeaway capacity Monday. WTI Midland was assessed at a $3.70/b discount to Cushing WTI, up 35 cents/b on the day.

S&P Global Platts Analytics is projecting crude oil output in the Permian to reach 5.266 million b/d by 2020, compared with 3.657 million b/d in 2018.

If Permian goes to "5," the Bakken goes to "2."