Four-hundred miles from the near overflowing tanks at the U.S. oil hub in Cushing, Oklahoma, a second glut in the Permian Basin of West Texas is pressuring oil prices once again as pipeline disruptions strand millions of barrels in the region.

The Permian, the fastest-growing shale play, accounts for about a fifth of the country's total oil production, and is expected to produce about 2 million barrels of crude a day in May. The region houses over 20 million barrels of crude storage.

Stockpiles in the Permian have hit several records in the last four weeks, according to data from industry information provider Genscape.

Investors have zeroed in on storage, waiting for declines in weekly inventory data to signal demand is rising or production is beginning to taper off. Stockpiles in Cushing, the delivery point for the U.S. futures contract, hit a record in the week to March 13, and Gulf Coast supply has been robust.

Now a Permian backlog shows signs of an even bigger supply glut. Pipeline interruptions next month will compound already high inventories in the region that have grown because production has outpaced takeaway capacity.

Crude from the Permian that gets stored in Midland, Texas, awaiting transport to the Gulf Coast, will be diverted to Cushing, where it will add to burgeoning supplies, possibly putting even more downward pressure on crude prices, traders said.

West Texas Intermediate oil delivered into Midland has slumped recently on news of planned work in May on two major pipelines in the region - Sunoco Logistics Partners LP's 300,000 barrel-per-day West Texas Gulf and the 280,000 bpd Mid Valley pipeline. These lines are primarily responsible for bringing Permian crude closer to refiners on the Gulf Coast.

Pipeline outages in May will result in extra barrels moved into Cushing, as physical oil traders will be "less likely to buy May WTI at Cushing for need of storage space for incremental May deliveries," said Dominic Haywood, an oil analyst at Energy Aspects in London.

"Prompt futures should reflect fundamentals and if cash is weaker, then that implies a softer May balance and thus weaker fundamentals."

On Thursday, the discount for WTI into Midland for May delivery traded as low as $2.50 a barrel below U.S. crude futures, the widest differential since early January, as traders looked to offload crude.

JUST TOO FULL

Since February, storage volumes and utilization rates have remained high in the Permian Basin, according to Genscape, which monitors four locations totaling about 18.5 million barrels in the region. Utilization rates are just under 70 percent and there are some 12 million to 13 million barrels of oil stored in tanks there.

There is a limited amount of space to hold crude in the Permian, Genscape said.

In Colorado City, Texas - the starting location of both Magellan Midstream Partners' 300,000 bpd BridgeTex and Sunoco's West Texas Gulf lines - set a record in stocks last week, although it was shy of a record utilization rate.

"You need to move it up to Cushing or move it to the Gulf Coast," said Hillary Stevenson, manager of supply chain network at Genscape. "If you have a lot of pipelines backed up, that's not good."

EARLY SIGNS

The first signs that storage was swelling appeared in the "roll" period for over-the-counter physical crude in Cushing, the three days following a future contract's expiration when refiners and traders square up final positions.

Fearing extra supply would eventually move to Cushing, traders dumped May barrels in the cash roll for as little as minus $1.60 on Friday, the lowest in four years.

Traders said the problem could be resolved in a month. WTI at Midland barrels for June are more than $1.50 a barrel stronger than May bids.

Still, crude inventories look to remain high, particularly as demand levels and production cuts might not be enough to start major drawdowns just yet, said Michael Cohen, head of energy commodities research at Barclays.

"We probably won't see the low levels initially anticipated, but we're not out of the woods yet in terms of clearing this crude," he added.

Source: www.reuters.com

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