Spread between WTI Midland and Cushing remains tight, positive for W TX names such as CXO and PXD

2013.06.02 - WTI Cushing-MidlandEnlarge Graph

  • Producers in the Permian region in West Texas generally receive prices on oil closer to the WTI crude priced at Midland (in Texas) rather than the domestic benchmark of WTI priced at Cushing (Oklahoma). When media sources refer to U.S. oil prices, they generally refer to WTI Cushing.
  • WTI Midland and WTI Cushing usually trade close to par, however, several times over the past two years the spread has blown out, sometimes to up to $20/barrel.
  • Spreads have tightened since the beginning of the year and currently WTI Midland actually trades at a slight premium. The gradual closing of the WTI Midland-Cushing spread over the past several months has been a positive medium-term catalyst for Permian-based producers.
  • As of May 31st, WTI Midland crude traded $0.15/barrel below WTI Cushing crude, unchanged from the prior week.

Oil and gas producers in the Permian Basin in West Texas suffer when the price of WTI (West Texas Intermediate) crude priced in Midland, Texas (WTI Midland) decreases relative to the domestic benchmark crude of WTI priced at Cushing, Oklahoma (WTI Cushing). Note that WTI Cushing is generally accepted as the U.S. benchmark for crude prices as it is a major storage and transportation hub for oil.

Permian producers suffer when WTI Midland crude decreases relative to WTI Cushing crude as the price they realize on their oil is generally closer to the Midland crude price, and when Midland crude prices decrease, they receive less revenue from the oil they produce. Some companies which this affects includes Range Resources (RRC), Laredo Petroleum (LPI), Concho Resources (CXO), and EOG Resources (EOG).

Midland crude traded as much as $14/barrel under WTI crude at the beginning of this year, but narrowed throughout 1Q13. Recently, WTI Midland has actually traded at a slight premium compared to WTI Cushing crude at points. Over the week ended May 31st, Midland traded up to $0.15/barrel above WTI, though closed the week $0.15/barrel below WTI.

Note that Midland crude has historically traded in line with WTI, as seen in the above graph. However, recently Permian production has ramped up significantly. Consequently, any disruption in takeaway capacity, which had been tight, caused spreads to blow out. For instance, if a pipeline that normally takes crude out of the Permian goes down for some reason, the crude must be redirected to other pipelines or find other transport. If these other options are fully utilized, it could cause a temporary glut of Permian crude, pushing prices downward. Additionally, takeaway capacity in the Permian had lagged the growth in production for some time, which caused a price divergence between WTI Midland and WTI Cushing. Companies in the Permian generally receive a price closer to WTI Midland crude than WTI Cushing, so this price divergence hit revenues of Permian producers.

As mentioned, Midland has traded at points at a slight premium to Cushing as infrastructure, such as Magellan Midstream Partners’ (MMP) Longhorn pipeline, have started service and helped to alleviate bottlenecks in the area. Additionally, Sunoco Logistics Partners (SXL) plans to start two projects which will increase crude takeaway service from the Permian in 2Q13.

The spread between Midland and Cushing crude was unchanged over the past week, which was a neutral short-term indicator. Midland crude’s increase in price relative to Cushing over the past several months has been a positive medium-term catalyst for Permian names. However, if takeaway capacity becomes tight, disruptions can have the effect of causing the spread to widen significantly again. More capacity coming online, such as the reversal of the Longhorn Pipeline, can mitigate these risks. Investors holding names with Permian exposure, such as CXO, LPI, RRC, and EOG, may find it prudent to monitor the Midland-WTI spread. Additionally, several names with Permian exposure can be found in the Vanguard Energy ETF (VDE).