pipelines for oil coming on-line 2H 2019, what's the expected impact

[nebbia + 4]

I have been struggling with this issue wading through SA stories and comments for a few days now, unable to reach any viable theories. In the 2H of this year 1.5mbbl per day of oil will be taken out of the Permian Basis through new pipelines placed in service, followed by another 1.5mbbl/day in 2020. 3bmcf/day of natural gas will also be taken out of the Permian in 2H 2019, followed by another 3bmcf/day added in 2020. For natural gas the impact seems like it will be absorbed into the network of pipelines and storage and prices will likely go down overall. Yes, there will still be regional differentials, but less so as the "network" seems to be able to absorb the new output more fluidly (no pun intended). For oil though, the bottleneck seems more physical in nature. The bottleneck will just be moved to the shipping channels and storage, which is already full.  Most of this additional oil will be exported. My question is, how long before the shipping channels can take away (or store) all the additional capacity coming on-line through the pipelines. If immediate, won't an additional 3mbbl/day in the next year and a half serve to drive the price down, potentially back into the 30's and 40's until demand can catch up? I'd welcome comments on NG, but my question really relates to oil prices and how they might be impacted by the new capacity coming on-line out of the Permian 2H 2019 and 2020. Do you think we should expect a sudden drop? Uncompleted wells are stacking up in the Permian in anticipation of these pipelines coming on-line.  

[wrs + 893]

The oil is already being produced but producers are getting hit with high pipeline tariffs due to capacity limitations. This will reduce tariffs and be good for producers until they can fill all this capacity.  If Permian output doesn't continue to grow then the area will be abundantly serviced with takeaway capacity at low rates which would be great for producers.  So if prices hold steady, expect production to grow until it's either limited by low prices or takeaway capacity.  There are plenty of buyers in the world for the Permian oil even if they aren't here in the US and takeaway capacity at the Texas ports is being increased as well.  What this will likely do is close the differential between brent and wti at right around $60/bbl.  That's my guess.

[MUI + 92]

I wouldn't look for a dramatic drop once the pipelines are completed and begin shipping oil. What you are going to see in these new lines to begin with is oil that was being shipped by rail and truck prior to the pipelines being operational. 

DUCs are an issue but they take time to bring online because there are only so many fracking crews/equipment. I read somewhere recently that in all the North American shale plays the fracking crews are finishing fewer than 50 jobs per day on average (I think it was somewhere closer to 40-41). The EIA estimates the Permian DUC count to be north of 4K right now and the total US count is about 9K. If you stopped drilling new wells right now and moved every frac crew to the Permian it would take 100 days to bring all these DUCs online if you could finish one per day. It takes longer than that to finish a job. Most take weeks and that is if you don't encounter any problems.

Don't look for the price of oil to drop because of the pipelines opening for business. Instead, go invest in a fleet of pumping trucks and sand haulers and vacuum trucks and sit back and count your money.

Edited February 27, 2019 by MUI