Like previous years, cold weather impacted the West Texas Permian crude oil supply chain this winter. Genscape data showed the impact of the recent freezing temperatures on production, storage levels, and pipeline flows in the Basin. Regional stock draws in mid-December helped protect downstream markets from the effects of production freeze-offs. Current storage inventories and takeaway pipeline capacity in West Texas would provide a sufficient source of crude barrels to withstand any further production freeze-offs of similar magnitude this winter, according to Genscape.
Crude production flows from the West Texas Permian Basin increased 108,000 bpd to 2.08 million bpd between December 23, 2016, and January 6, 2017, following weather-related cuts in the preceding weeks when temperatures in the region dipped below freezing, according to Genscape.
Storage inventories at Genscape-monitored West Texas terminals increased 2.4 million barrels (bbls) in the same two-week span, while production rebounded and outgoing pipeline flow declined. Stocks have rebounded with production in January and February for every year since 2011.
Temperatures in West Texas dropped below freezing from December 8 to December 9, and again from December 17 to December 20. The winter weather curtailed production levels in the country’s most prolific production play - an event Genscape has observed in previous years. Production flows from the Permian decreased 46,000 bpd and 82,000 bpd for the respective weeks with freezing temperatures. Flows reached an eight-month low of 1.972 million bpd for the week ending December 23.
Lower supply contributed to decreased inventories held in storage in West Texas. Stocks fell more than one million bbls from December 9 to December 23. Stocks in Midland, Texas, the largest hub in the region, moved against the overall trend, reaching a two-month high of 5.6 million bbls for week ending December 16.
Inventories at the Midland hub increased as the differential between West Texas Intermediate crude in Midland and Cushing, Oklahoma, reversed and widened to a premium. WTI-Midland traded at WTI-Cushing plus $1.50/bbl on December 19, which is the largest premium since Genscape began assessing the differential in October 2015.
It is possible that some stocks in Midland were of an atypical West Texas quality that varies from the specifications of the WTI futures contract. Permian crude may become lighter in quality during periods of extreme cold, RBN Energy said in the blog, Don't Leave Me This Way - Prepping Crude For Pipelines, And A Mini-Crisis In The Permian, published in January 2017.
Feeding the Beast: Supplying Cushing During Production Outages
The Midland hub supplies crude barrels to Cushing via Plains All American’s 450,000 bpd Basin Pipeline. Although barrels backed into Midland in mid-December, Basin flows and Cushing stocks remained relatively steady. For week ending December 16, when market participants stockpiled crude at Midland, Basin pipeline flows into Cushing averaged 260,000 bpd. Weekly flows were within 10,000 bpd of the four-week average. Cushing stocks increased marginally that week, up 315,000 bbls to 68.7 million bbls on decreased pipeline flow from Cushing to the Gulf Coast, according to Genscape’s Mid-Continent Pipeline report.
With decreased supply from Midland, barrels were drawn out of storage at the Wichita Falls, Texas, terminal, which lies between Midland and Cushing. For week ending December 16, Wichita Falls stocks fell 827,000 bbls. The available stockpiles located further down Basin Pipeline helped cover the lost supply caused by Permian production freeze-offs and market dynamics at Midland, minimizing the potential impact to downstream markets.
How Low Can You Go: Assessing Potential Production Cuts and Supply Chain Effects
Genscape analysis showed that the current conditions of the West Texas supply chain would handle more than two weeks of similar production freeze-offs without significant disruption to downstream markets.
The longest cold front for the Midland region in the past five years came in early January 2015, when temperatures dipped below freezing for eight consecutive days, according to Weather Underground. Permian production flows decreased nearly 300,000 bpd, or 16 percent, to 1.6 million bpd between December 26, 2014, and January 9, 2015, also coinciding with falling crude prices, according to Genscape. The drop in production remains the largest two-week decrease since historical records began in 2010.
The reoccurrence of weather-related production cuts in West Texas raises the question of what the potential effect could be from sustained, freezing temperatures in the region. Taking into account storage inventories, production levels, outgoing pipeline flows, and regional refinery capacity, how long would it take before the West Texas supply source runs dry?
Although Genscape has observed Permian production cuts for several consecutive winters, production has never stopped altogether due to freeze-offs. Even in persistently low temperatures, there would still be supply reaching West Texas storage terminals. Assuming a decrease in production proportionate to January 2015 as the worst case scenario for freeze-offs, Permian production flows could hypothetically drop 324,000 bpd from current levels to 1.756 million bpd.
About 2.095 million bpd of pipeline capacity currently carries crude from West Texas, with 620,000 bpd connected to Oklahoma markets and 1.475 million bpd destined for Gulf Coast markets. For the sake of argument, the analysis assumed that all outgoing pipelines are operating at full capacity.
Seven refineries in Texas and New Mexico have connectivity to Permian production via smaller feedlines, furthering demand by 679,000 bpd. The analysis also assumed that these refineries are operating at the highest possible run rates.
Given reduced Permian production of 1.756 million bpd and a maximum of 2.774 million bpd in refinery and pipeline capacity, demand could outpace supply by 1.018 million bpd. As of January 6, more than 17 million bbls of crude were in storage at Genscape-monitored West Texas locations. It would take nearly 17 days to deplete these stockpiles if refinery and pipeline demand were at capacity.
More realistically, outgoing pipelines would not be operating at full capacity. Using average 2016 flows (and generalizing average utilization rates of West Texas-to-Gulf Coast lines for unmonitored pipelines), outgoing pipeline flows decrease to 1.478 million bpd. This would more than double the time it would take to deplete storage inventories.
As mentioned before, some barrels in storage may not be deliverable against the WTI contract due to complications with producing in low temperatures. Still, as long as stock levels going into the cold front were within the range seen in the past year, West Texas markets should be able to outlast any freeze-offs comparable to those experienced in recent years.
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