Pipelines ask U.S. drillers to slow output as storage capacity dwindles

By Javier Blas on 3/30/2020

LONDON (Bloomberg) - American pipeline operators have begun asking oil producers to voluntarily ratchet back their output in the clearest sign yet that a growing glut of crude is overwhelming storage capacity.

Plains All American Pipeline LP, one of the biggest shippers of crude in the U.S., sent a letter this week asking its suppliers to scale back production. The notice came from the company’s marketing unit that buys and sells oil to customers. A Texas oil regulator said Saturday that drillers were getting similar notices from pipeline operators.

The messages signal the oil market is fast approaching the moment traders have been warning about -- when crude supplies overflow storage tanks and pipelines as the coronavirus pandemic drags down oil demand by the most in history.

“We are sending this proactive request to our suppliers to ask that you take steps to reduce oil production in response to the pandemic,” Houston-based Plains said in the letter obtained by Bloomberg.

Plains didn’t immediately have comment on its request. The company sent a separate letter requiring customers to prove they have a buyer or place to offload the crude they’re shipping, according to people familiar with the matter. Enterprise Products Partners LP put out a similar call, one person said. The firm didn’t immediately have comment. The idea is to prevent anyone from parking oil in pipelines.

Physical Prices. On Saturday, Ryan Sitton, a member of the Texas Railroad Commission that regulates the state’s oil industry, said he’d heard that “some Texas producers are starting to get letters from shippers (pipelines) asking for oil production cuts because they are out of storage.”

There were already signs that North America’s storage system was nearing its limit. On Friday, prices for physical delivery of several key crude grades in North America plunged to the lowest levels in decades.

West Texas Intermediate crude in the heart of the Permian shale region plunged to $13.01 a barrel, the lowest since 1999. West Canada oil crude neared $5 a barrel. Trading house Mercuria Energy Group Ltd. bid just 95 cents for Wyoming Asphalt Sour, a dense oil used mostly to produce paving bitumen, and said the same barrel was bid at below zero earlier this month.

U.S. oil refiners have been cutting back on the amount of crude they buy and process as lockdowns across the nation keep cars off the road, sending gasoline demand plummeting. Retail pump prices have, in some places, fallen below $1 a gallon.

U.S. shale producers have begun to throttle back drilling, but it could take weeks if not months before that translates into a meaningful decline in oil production. Meanwhile, Cushing, Oklahoma -- a major oil-storage hub -- is already more than half full.

Sitton has been pushing a plan that would have Texas imposing limits on its crude production as part of a deal with the Organization of Petroleum Exporting Countries. “We need to get in front of this,” he said on Twitter Saturday.

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