Echoes of the boom

The crude price crash has producers scrambling and lawmakers planning, but from Cushing to the Atlantic coast the US oil production boom still echoes loud and clear.

A flood of US oil may once again be flowing to that key storage and pricing hub in Oklahoma thanks to new pipeline construction, setting up a repeat of the glut that widened the Brent/WTI spread to as much as $20/bl.

“It’s déjà vu all over again and it looks like it’s happening,” Lipow Oil Associates president Andy Lipow told the Argus Crude Summit in Houston this week. “Cushing could physically once again get overwhelmed if production continues to rise and rise quickly.”

Crude could be backed up all the way into the Rocky Mountains and North Dakota, where the growing crude-by-rail infrastructure will still be waiting, ready to take advantage, Plains All American Pipeline chief executive Greg Armstrong said. The midstream company has sharply cut back its expectations for crude-by-rail for 2015, but rail will still have a fighting chance as the market continues to flex.

“We think you’re going to see a little bit of that shift back and forth,” Armstrong said. “If you stay tuned, you’ll see volatility in all of the spreads.”

Refiner/midstream operator Phillips 66 has dimmed it outlook for US domestic crudes’ discounts to waterborne barrels this year, cutting them in half. But the increased global crude supplies are slow to work their way through the system, said Phillips 66 president Tim Taylor. So the trains keep on rolling to the Atlantic coast.

And even when the waterborne supplies put pressure on domestic prices, Taylor says domestic prices will drop to stay competitive.

“I think, fundamentally, this increased supply in terms of import options will put pressure on the inland US crudes,” Taylor said. “And that’s why we’d expect the differentials to come back out from where they’ve been.”

And over in Trainer, Pennsylvania, home to what was once the poster child for all that was wrong with the US Atlantic coast refining business, Delta Airlines’ refining subsidiary Monroe Energy is content with its domestic crude slate.

A mix of success in the spot markets and an assortment of third-party contracts — a five-year contract with Bridger Energy for at least 65,000 b/d via rail and barge, mid-term contracts with BP for Eagle Ford crude from the US Gulf coast and other short term deals — are working out just fine, chairman Graeme Burnett said on the sidelines of the summit.

The refiners and midstream companies will change their tune eventually along with the changing flows of crude. But for now the boom’s not busted, and the echoes still ring.

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