Largest Permian Discounts Since March Supporting Crude-by-Rail

Crude in the Permian Basin weakened to the lowest level in more than three months as a refinery in the region was said to prepare to shut down, supporting rail shipments out of the largest onshore oil field in the U.S.

West Texas Sour crude priced in Midland, Texas, fell by $2.75 a barrel to a discount of $11.50 less than the same crude in Cushing, Oklahoma, the delivery point for U.S. oil futures, according to data compiled by Bloomberg. It’s the largest difference since March 20 between the two oil hubs separated by 500 miles.

Phillips 66 plans to shut most of its 146,000-barrel-a-day refinery in Borger, Texas, for as long as 35 days after it was unable to recover from a power failure, according to a report from Energy News Today. The refinery processes some WTS, a medium-density, high-sulfur crude from West Texas. Phillips declined to comment on the report when contacted by Bloomberg.

WTS historically traded at a discount of a few dollars to WTI to account for quality differences and the cost of pipeline transportation from Midland to Cushing. The discount widened in 2012 and again this year as booming production overwhelmed takeaway capacity.

Rail Shipments

Output in the Permian, the largest onshore oil field in the U.S., has jumped by 79 percent since the start of 2010 as producers have used horizontal drilling and hydraulic fracturing to blast crude out of previously inaccessible underground shale rock. The basin now produces about 1.57 million barrels a day, Energy Information Administration data show.

The large discounts have supported crude shipments by rail out of the region. The price of light, sweet WTI in Midland is $12.70 below Light Louisiana Sweet crude in St. James, Louisiana, where NuStar Energy LP and Plains All America Pipeline LP operate rail off-loading facilities.

Iowa Pacific Holdings LLC moves 70,000 to 200,000 barrels a week of crude out of the Permian on two short-line tracks. They connect to Union Pacific Corp. and BNSF Railway Co. routes that take the crude to the Gulf Coast or California, said Bruce Carswell, the West Texas operations manager for Iowa Pacific.

“What we’re hearing right now is the forecast for at least through July, volumes are going to continue to move out of the region by rail,” he said.

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