Texas oils drop to record lows as supply fills up infrastructure

Two Texas oil grades dropped to their lowest levels on record against the benchmark West Texas Intermediate as rising production couldn’t reach markets because pipelines are full.

Texas oil production increased 35 percent to an average of 2 million barrels a day in August from a year earlier, Energy Department data show. New drilling techniques have unlocked oil in shale rock formations, boosting the state’s output to the highest level since 1988.

West Texas Intermediate oil delivered in Midland, Texas, fell $5.25 to a $13-a-barrel discount below the same grade of oil delivered in Cushing, Oklahoma, as of 2:06 p.m. New York time, according to data compiled by Bloomberg. The discount for West Texas Sour widened by $7 to $15 a barrel. Those are the widest discounts for the two grades on record.

“Increasing oil production has filled Midland storage and the pipelines out of the region are completely full,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Plains All American Pipeline LP (PAA) operates the Basin pipeline that can move up to 450,000 barrels a day of oil from the Permian Basin region in West Texas and southern New Mexico to Cushing.

WTI in Midland averaged a 79-cent discount during the past five years, and West Texas Sour averaged $2.76 below the benchmark.

In the Gulf of Mexico, light crude oils jumped to their highest level in more than a year after the December futures contract on the New York Mercantile Exchange expired last week.

Light Louisiana Sweet rose $3.25 a barrel to a $28 premium to WTI, while Heavy Louisiana Sweet rose $3.75 a barrel to a $26.75 premium. It was the highest premium for both grades since Oct. 21, 2011.