WTI Cushing-WTI Midland spread
The WTI Cushing-WTI Midland spread, a key indicator for Permian producers, saw a steep contraction last week. The spread fell to $14.6 per barrel by the end of the week compared to highs of $17.8 per barrel in the week ending August 31. However, the current spread is still high compared to the previous month’s low of $12 per barrel and the one-year average of $5.0 per barrel.
The recent weakness in crude oil and a slight decline in Permian drilling activity could be the major reasons behind the narrowing of the WTI Cushing-WTI Midland spread. According to Baker Hughes, the total Permian rig count was 484 as of September 7 compared to 486 in the prior week.
Moreover, the announcement by Energy Transfer Partners (ETP) that it will proceed with its plans to construct the Permian Gulf Coast pipeline (or PGC pipeline) could be another major reason behind last week’s fall in the WTI spreads. The PGC pipeline, which is to be jointly constructed by Energy Transfer, Magellan Midstream Partners (MMP), MPLX LP (MPLX), and Delek US Holdings (DK), would increase the takeaway capacity from the Permian region. The PGC pipeline and a few other major pipeline projects are expected to reduce the pipeline constraints in the region in the next two years.
How it impacts Permian producers
The narrowing of the WTI Cushing and WTI Midland spread is positive for Permian producers and will likely result in improvement in the average realized sale prices. Major Permian producers include Pioneer Natural Resources Company (PXD), Diamondback Energy (FANG), and WPX Energy (WPX). Most of the producers hedge a portion of the losses arising due to these price differentials.
In the next article, we’ll look into last week’s worst-performing upstream companies.