Midland crude discounts a long way off

OREANDA-NEWS. March 01, 2016. Stronger margins for sour crude on the US Gulf coast and a drain on midcontinent crude storage will eventually restore west Texas crude discounts, refining executives in the region said today, but not too soon.

Alon USA and Western Refining expect production from nearby West Texas and New Mexico fields to eventually trade at a transportation-based discount to the crude storage hub at Cushing, Oklahoma. But for now discounts for Midland-priced crude have withered as new pipeline capacity to Houston came on line and Cushing storage tanks filled over the past five months.

Refiners that could purchase Midland light, sweet crude at an average \\$3.30/bl discount to Cushing during the fourth quarter of 2014 saw just a 36?/bl discount during the same quarter in 2015. Midland in the first quarter so far averaged a 25?/bl premium to Cushing, compared to a \\$1.31/bl discount last year.

Alon USA has trucked light, sweet Midland production in the Permian basin to its 73,000 b/d refinery in Big Spring, Texas. Western Refining developed pipeline logistics to supply all of its 105,000 b/d to 110,000 b/d light, sweet crude demand at its 125,000 b/d refinery in El Paso, Texas.

Western chief executive Jeff Stevens saw early signs of a return to Midland discounts in news that Magellan expected an unnamed shipper with 10pc of its 300,000 b/d BridgeTex crude pipeline capacity to default on a take or pay contract.

"That's what we're ultimately going to see," Stevens said during a call to discuss quarterly earnings. "A normalization that shippers are going to ship barrels if it makes sense from a quality or economic standpoint."

Reduced US Gulf coast demand could also ease demand supporting Midland prices. US Gulf coast refiners have returned their attention to discounted sour crudes as light, sweet production ebbs and can find a global market. Sour crude crack spreads on the US Gulf coast have averaged higher than sweet crude margins since the third quarter of last year, based on Argus assessments. But

Cushing continues to determine Midland pricing despite new Permian pipeline access to the US Gulf coast, Alon USA senior vice president of supply Alan Moret said today during a conference call to discuss earnings.

"It's when those inventories come down again, I think that's where you can move back out to that 50?/bl Midland-Cushing differential," Moret said.