By Collin Eaton (NYSE:ETN)
HOUSTON (Reuters) - Pipeline operator Lotus Midstream LLC may reverse flows on a line now sending crude from West Texas to Cushing, Oklahoma, the main hub for pricing U.S. crude futures, three people familiar with the matter said on Tuesday, an unusual move that could lift U.S. benchmark prices by draining supplies.
Reversing the flow on a portion of Lotus's Centurion pipeline would send oil on a circuitous route from the country's main storage hub at Cushing to the its top shale field in West Texas and then via new pipelines into Gulf Coast export hubs, they said.
But with the operators of the new pipelines offering discounted prices to attract shippers and as oil in West Texas fetching higher prices than in Cushing, the reversal would be lucrative for shippers, traders and analysts said.
"Centurion is always evaluating the best ways to serve its shippers," said Lotus spokeswoman Casey Nikoloric, declining further comment.
Centurion, which consists of two lines rated at 170,000 barrels per day (bpd) combined, had the smaller line flowing to West Texas. But in 2014 former owner Occidental (NYSE:OXY) Petroleum shifted its direction to Cushing to take advantage of the then-deep discounts on shale in the Permian Basin.
(For a graphic showing storage levels at Cushing, see here: https://tmsnrt.rs/2Zcj3Kd)
Lotus is considering reversing the flows on either its Centurion North Line, which has 110,000 bpd of capacity, or the South Line, with 60,000 bpd capacity, the people said.
Permian output has risen to 4.3 million bpd from 1.68 million bpd since that reversal, helping drive U.S. crude exports this year above 3 million bpd, according to U.S. government data. Three new pipelines from the Permian will increase existing capacity by two-thirds, with about 2.5 million bpd in additional space.
Reversing one line would support crude prices at Cushing as storage there is drained, and restrain Midland prices that have risen with the startup of new Plains All American Pipeline LP (N:PAA) and EPIC Midstream Holdings LLC's lines, traders and shippers said.
"The Midland differential to Cushing would be a lower premium than expected," one U.S. trader said. "The reversal would help pull down Cushing (inventories) faster," he added.
Inventories at Cushing fell to 44.8 million barrels in the week ended Aug. 9, after peaking at 53.5 million in mid-June.
On Tuesday, Midland crude for October delivery traded 25 cents a barrel above the Cushing benchmark, traders said. Houston prices for September delivery traded at a $2 per barrel premium.
"It would actually have an enormous psychological impact on market even if the flow isn't huge," an oil trader said. "To be able to swing from Cushing back into Midland would be very, very interesting."
Crude volumes on the Centurion pipeline fell to 126,000 bpd last month from a 2019 peak of 230,000 bpd in February, according to market intelligence firm Genscape. February volumes were boosted by the use of drag reducing agents, it said.
"We expect flows to taper off as spot shipments favour new capacity to the Gulf, and the Centurion pipeline has been the canary in the coal mine for that," said Ryan Saxton, Genscape's director of oil and midstream.