The crude oil price spread from Midland to the Magellan East Houston (MEH) market is primed to significantly widen later in 2024 and 2025, according to flows predicted in East Daley’s Crude Hub Model, creating the potential for more profits moving barrels.
While we don’t expect spreads to blow out to the $12/bbl range seen in 2018, East Daley believes the market is underestimating the potential for regional volatility.
The MEH hub on the Houston Ship Channel currently trades at a $0.30/bbl premium to WTI-Midland. Futures contracts are pricing the MEH-Midland spread to average ~$0.42 for the rest of 2024 and $0.80 in 2025. By contrast, EDA expects the MEH-Midland spread will eventually increase to ~$2.00, or 150% above current expectations, without new pipe expansions (see figure 1).
Volatility will come from relatively lower WTI-Midland prices. As Permian crude oil production continues to grow, pipelines leaving the basin will fill. The Crude Hub Model predicts total Permian egress to exceed 80% utilization starting in July 2024. Midland prices will come under pressure as pipe capacity grows scarce, causing the spread to MEH to widen.
Our expectations are based on pipeline economics. With crude oil pipes to Corpus Christi and Houston filling, the lion’s share of remaining egress capacity is on routes running to the Cushing hub in Oklahoma. In order for a Permian barrel to reach the Gulf Coast via Cushing, it must first travel north to Cushing and then south to the Houston/Nederland markets, incurring additional tariffs. The barrel will also likely lose its premium as a ‘pure Permian’ barrel due to extensive blending at Cushing.
The 2018 MEH spread blowout was mainly due to pipeline constraints. As Permian egress approached 80% utilization in 2018, MEH prices averaged $7+/bbl over Midland. Available pipeline space leaving the Permian averaged ~460 Mb/d at the time.
EDA in the Crude Hub Model forecasts pipe utilization to cross 80% once again by July 2024, yet spreads are much tighter in futures trading. One key difference now is that Permian shippers have much more overall capacity available after the construction of several greenfield pipelines. The latest Crude Hub Model forecasts available pipeline capacity to average ~1,100 Mb/d in 2H24, more than double the available egress in 2017 and 2018 (see figure 2).
The Permian Basin saw strong growth in 2023, and East Daley’s Production Scenario Tools forecast the Permian to grow another 6% through 2024. The bulk of this supply growth will take place in 2H24 and amount to 245 Mb/d of incremental volume, ending the year at 6.5 MMb/d of production.
We expect MEH-Midland volatility to pick up later in 2024, and we will keep a close eye for potentially bigger price swings in 2025. While Enbridge’s (ENB) new plan to expand Gray Oak Pipeline would dampen upside, we view the latest announcement as confirmation of the growing tightness in moving Permian crude oil. – Kristy Oleszek Tickers: ENB.
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