What is the Permian Blowout?

Armed with a plan to flood the global market with American fossil fuels and aggressively push prices down, the Trump administration's "Energy Dominance" slogan has fuelled fierce controversy. Now, the White House could be about to encounter a backlash, with experts warning that a "Permian Blowout" is looming.

Located in West Texas, the Permian Basin is the epicentre for US oil production. Currently, production is outrunning pipeline capacity, with Bloomberg Intelligence reporting the Permian Basin is currently equipped with 3.1 million barrels-a-day of pipeline transportation capacity, though produces 3.3 million barrels-a-day of oil. As a result, US suppliers are being forced to slap heavy discounts onto barrels.

Speculation over 2020 pipeline target

While new pipelines are expected to be up and running by 2020 and increase transportation capacity by 5 million barrels a day, the futures market isn't as optimistic. Discounts on US oil start to narrow slightly in futures contracts extending past 2019, though the small margin implies ongoing logistical constraints.

Furthermore, while new Permian Basin pipelines might ease an oversupply of inland oil, they won't be able to smooth over any bottlenecks that potentially emerge at coastal wells and refineries. As a result, experts maintain that ports on the Gulf Coast could encounter storage, barrelling and loading constraints which add to the risk of a Permian Blowout.

Fierce competition from heavy oil

There are also concerns over an influx of relatively light crude sourced from Permian Basin production versus heavier barrels imported from competitors like Canada. Gulf Coast refiners often prefer the latter as they're cheaper and are helping to bridge the gap left by Venezuela in the wake of its oil industry collapse. Furthermore, when run through Gulf Coast refineries heavy oil yields more low-sulphur distillates. With demand set to spike in 2020 due to tighter shipping emission standards, this adds to the devaluation of Permian Basin oil.

Permian markets take a hit

Markets are reflecting the risk of a Permian Blowout, with major energy names like Diamondback (FANG), Cimarex (XEC) and Concho (CXO) all down for 2018, a trend that's largely down to the dramatic pricing differential between Midland and WTI.

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