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America’s top oil-producing region has a new problem: $40 crude

America’s top oil-producing region has a new problem: $40 crude

Published on Cnbc.com  by Tom DiChristopher

  • Crude oil in the Midland, Texas, area, the epicenter of the U.S. shale boom, slumps to about $40 a barrel.
  • At that price, crude is selling below the price that many drillers need to bring on new wells at a profit.
  • Prices need to remain low to heap real pain on Permian drillers, but analysts think some oil companies are already preparing to tighten their budgets.

If Tuesday’s collapse in U.S. crude prices below $46 a barrel looked ugly, try being a driller in the Permian Basin, the epicenter of the U.S. shale oil boom.

Crude is trading at about $40 a barrel in the western Texas region that sits atop most of the Permian Basin. At that price, oil is selling for less than the cost of developing new wells, raising concerns for a region that emerged from a bruising downturn just two years ago.

“When you get down below $40 a barrel in the Permian, you are talking about a potential recession in a sector that you probably never ever thought might be prone to a recession in 2019,” said Tom Kloza, global head of energy analysis at fuel price service OPIS.

That is a stark prospect for a region where oil production is booming and energy companies can’t seem to find enough workers. Surging output from the Permian has powered American production to all-time highs above 11 million barrels a day, making the United States the world’s top crude oil producer.

But all that new supply has created bottlenecks in a region with too few pipelines to bring the crude to market. That has caused the regional crude grade in the Midland, Texas, area to trade at a steep discount to benchmark U.S. West Texas Intermediate crude futures, which are based on deliveries at the storage hub in Cushing, Oklahoma.

On Tuesday, Midland-based WTI was trading at about $7.25 to $7.60 below benchmark U.S. crude prices, according to OPIS. The lowest transaction confirmed by OPIS saw Midland crude sell for $40.10 per barrel.

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