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U.S. oil pipeline operators gear up for higher shale output -Breaking

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© Reuters. FILEPHOTO: A steel drill pipe seen in sunrise at Parsley Energy’s Permian Basin, Texas U.S.A. on August 24, 2018. Picture taken August 24, 2018. REUTERS/Nick Oxford/File photo

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Arathy Smasekhar

HOUSTON, (Reuters) – The crude oil flow on U.S. pipelines could reach pre-pandemic levels in October according to analysts. This signals the end for many Texas pipeline operators.

A shale-oil pipeline boom of construction was halted by the pandemic. It had increased 2.5 million barrels per hour export capacity between West Texas and U.S. Gulf Coast hubs. The overcapacity of oil caused pipeline companies in the early 2020s to cut rates and offer sweetened terms as oil prices crashed.

With oil prices hovering around $100 per barrel, the Permian basin in West Texas and New Mexico has a rising production of oil.

According to East Daley Capital, this would still fall below the pipeline capacity of approximately 6.6 million BPD.

However, the arb (or price at the coast) is increasing again, compared with origination point in Midland Texas. The contraction began in March 2020 and was an early sign of rising shipping costs.

U.S. crude is being traded at Magellan Midstream’s terminal in East Houston, NYSE:) Partners for January 2023 deliveries. This price represents an 80-cent premium to Midland and 1 ahead of Midland until December 2023. On Friday, the spread was approximately half that.

Willie Chiang said last week that Permian’s output will rise and that the “spare capability” of oil pipeline operators Plains All American would tighten. He also stated that tariffs on water will return to a normalized level.

Magellan Midstream Partners LP Longhorn Oil Pipeline Company, operator, has stakes and other holdings to the coast. It told investors that the Permian’s rising oil production may prompt it to reconsider plans to transform its Permian pipeline to the Gulf Coast to make oil products.

According to East Daley Capital, the Permian-to-the Gulf Coast pipeline utilization is expected to increase to 77% in October and rise to 80% at the end of this year. In April, it was at 70%.

The majority of money that pipeline companies earn comes from long-term deals with producers and refiners. These contracts guarantee payment, even if the users never ship any oil. Pipeline companies like Magellan and Enterprise Product Partners were able to pay their bills during the pandemic. Energy Transfer Customers were offered sweeter terms in existing contracts by (NYSE:), and they agreed to lower rates when the contracts were renegotiated. This was done to maintain long-standing relationships and not force producers to pay more during downturns.

According to pipeline operators, they are still signing shorter-term contracts because spreads are low. They will switch to longer-term agreements once arbitrage increases.

Baker Hughes data shows that the Permian oil rig count, which is a measure of future production, has risen 14% this year. Energy firms are also planning to increase capital spending in 2022 for the second consecutive year to expand their rigs and improve production.

“I believe this is a fantastic story, or a great place to be as a middlestream operator in that they’re no longer facing the same risk as a year ago when it was very dire,” stated AJ O’Donnell of East Daley Capital.

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