Permian After Price Shocks — For Liquids, Not Much Has Really Changed

Originally published for customers May 4, 2022.

What's the issue?

Arbitrage opportunities open when commodity price anomalies occur between disparate locations and the cost to transport between them is low enough to net a positive return for the shipper.

Why does it matter?

Every penny counts and the ability to confidently calculate arbs into the future is crucial to understand and maximize deal favorability.

What's our view?

Arbo pulled historical crude and liquids rate data for the Permian region in particular, where takeaway capacity and competition has fiercely increased in the past few years, and open arbs have been scarce. Our analysis explored throughput models, trends in incentive rates over time, and impacts of recent crude price shocks on the forward arb curve. Regardless of enduring post-covid supply and demand issues, international conflict, and increased prevalence of discounts in the Permian, the forecast shows arbs remaining negative until November 2022.

 


 

Arbitrage opportunities open when commodity price anomalies occur between disparate locations and the cost to transport between them is low enough to net a positive return for the shipper. Every penny counts and the ability to confidently calculate arbs into the future is crucial to understand and maximize deal favorability.

We took a close look at the Permian market, where takeaway capacity and competition has fiercely increased in the past few years, and open arbs have been scarce. Our analysis explored throughput models, trends in incentive rates over time, and impacts of recent crude price shocks on the forward arb curve. Regardless of enduring post-covid supply and demand issues, international conflict, and increased availability of discounts in the Permian, the arb forecast remains negative until November 2022.

 

More Competition; More Incentive Rates

As we discussed in Permian is Both Overbuilt and Underbuilt Depending on the Product, several midstream majors are contemplating new intrastate gas pipeline projects and conversion of Permian liquids pipes for natural gas transport — as pressure to increase energy production mounts and ESG debates bring increased scrutiny to the practice of flaring.

For a deep dive on Permian gas market dynamics, infrastructure projects and forecasts, register for the May 11 webinar to be first to hear new analysis from Arbo and East Daley.

In contrast, Throughput Models by East Daley inside the Liquids Commerce Platform help visualize significant liquids capacity overbuild, and provide insight into known crude shippers and volumes. Models show pipe-level utilization ranging quite broadly from 25% to 91%, with aggregate basin egress throughput modeled to grow from 62% in early 2022 to 74% by late 2022.

East Daley Throughput Model


Pipes heading to Cushing suffer from particularly low utilization in contrast to Houston, Nederland, and Corpus.

Permian Egress Corridors - Utilization

If utilization is an indication of deal favorability, this finding is consistent with less profitable arbs to Cushing than other corridors — quickly checked in the platform’s Arb Tracker.

Arb Tracker

 


Likely correlated to the region’s increasing liquids takeaway competition was a trending prevalence of incentive rates. Arbo’s historical rate database allowed us to uncover the surging percentage of filers offering discounts there — up from 5% in 2019 to 43% so far this year.

 

Permian Filers

 

Has Price Volatility Impacted Arb Opportunities?

As we’ve observed throughout Covid-19 and, especially, since the Russian invasion of Ukraine, energy markets can shift rapidly! The price of a WTI Cushing barrel moved from $75 in January to a peak near $123 in early March (when we pulled data used for the following analysis).

To illuminate any potential effects on deal favorability, let’s contemplate a hypothetical commitment sometime between April and December 2022 — for barrels leaving the Permian — and let’s say we’re evaluating two alternative routes: to Corpus Christi on Gray Oak and to Nederland on Permian Express.

The oil price spiked, but how did our future deal economics change between January and March? We compared historical and future arb calculations for these two pipe options through the rest of this year. (For simplicity, we’ve not included charges like gathering and PLA in this example.)

 

Permian Egress Arbs

 

As shown, impacts varied by destination. The price shocks did support improved arbs in late 2022 for both Corpus Christi and Nederland — but with only the former actually cracking open above $0, making a Q4 Gray Oak deal likely more favorable than heading to Nederland on Permian Express.

 

Factoring In Charges and Product Loss Allowance

There are myriad extra charges in the liquids tariff ecosystem, and they are described with varied language by different filers. We categorized the charges in Gray Oak and Permian Express tariffs as follows.

 

Pipeline charges comparison

 

With these charges conveniently exposed, arb calculations can be fine-tuned to compare deal economics and evaluate competition.

Arbs are time-consuming to calculate en masse — but Arbo enables BDs, marketers and traders to more quickly and confidently analyze the impact of particular market forces on arbs and route favorability. Whether you need a bird’s eye view of the market landscape or want to visualize transport economics at scale, lean on Arbo’s liquids software combined with API access or alternate bulk data delivery (custom-integrated into your existing intelligence tools) to draw faster and more confident conclusions.

Explore the Liquids Commerce Platform at app.goarbo.com/register.

To learn more about Arbo’s API and bulk data offering, contact us.

 

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