The Seaway oil pipeline, which is starting operations this week with an initial capacity of 150,000 b/d, may increase the relative discounts of crude at Midland, Texas, Deutsche Bank said Monday.
"With pipeline capacity constraining booming Permian oil supply growth, Midland crude prices have blown out relative to WTI [West Texas Intermediate], which itself is already heavily discounted," Deutsche Bank analyst Paul Sankey wrote in a report.
Seaway, a joint venture of Enterprise Products Partners and Enbridge, is a 500-mile pipeline that runs from Freeport, Texas to Cushing, Oklahoma. The partners are reversing the line to move some of the increasing volumes of Permian Basin production from Cushing to Gulf Coast refineries.
The Midland/WTI price blow-out "is directly beneficial to Rockies refiners," Sankey said, especially Western Refining which is "the most exposed to Midland discounts."
Sankey noted the WTI Cushing versus WTI Midland crude differential reached $9/barrel in mid-March. While it fell in early April to about $4/b, it has since climbed to about $5/b.
Seaway is to begin shipments on Thursday. Pump station additions and modifications will bring its capacity to 400,000 b/d by early 2013 and 850,000 b/d by mid-2014.
Given initial crude transit time of about 15 days and estimated transport rates of $3-$4/b, "the initial shipments will tend to put downward pressure on LLS [Louisiana Light Sweet] grades, which are now trading at a $1-$2/b discount to Brent versus a $1-$2/b premium in the past 30 days, and narrow Brent-WTI," said Sankey.
"However, the Seaway will not alleviate the pressure at Midland, in our view, and therefore as WTI increases in price relative to Brent and LLS, the relative Midland discount will widen further," he added.
