The Permian basin's pipeline network is filling up and there is more oil on the way.TheUS Energy Information Administration is predicting production will hit3.156 million barrels per day (mb/d) of output in April, up 850,000 bpd from a year ago.This is likely going to put pressure on prices.The Permian basin is driving U.S. shale growth, with expectations that the basin will add enormous volumes this year, keeping the oil market well-supplied. But the Permians pipeline network is already filling up, forcing steep discounts for oil, and threatening to derail the aggressive growth projections for the region.The EIApredictsthe Permian will hit 3.156 million barrels per day (mb/d) of output in April, an increase of 80,000 bpd from March, and up a shocking 850,000 bpd from a year ago. Shale E&Ps and the oil majors are pouring in billions of dollars into the region, and two out of every three rigs the industry is adding is going into the Permian.But the shale basin is getting crowded, which not only means skyrocketing prices for land and a search for opportunities along the periphery, but also rapidly shrinking availability on the Permians pipeline network. As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast, John Zanner, energy analyst for RBN Energy, toldReuters.Oil market analysts knew that new pipeline capacity would be necessary in order to move all of the oil out of the Permian. But few expected the region to run out of pipeline space so quickly.At the end of 2017, there was just 160 kb/d of line space available out of Western Texas. This small surplus is likely to turn into a deficit in the second half of 2018, the IEA wrote in its March Oil Market Report. The pipeline gap could widen further until mid-2019, in turn reducing the price of WTI Midland relative to Cushing.Other bottlenecks, such as shortages of sand and labour, as well as mounting demands for investor returns, could also slow growth, but most likely beyond 2018. For now, US producers continue to ramp up activity, the IEA wrote in its March Oil Market Report.The IEA was spot on, except that the bottleneck the agency predicted is already starting to materialize. Even late last month when the IEA warned about pipeline issues, the thinking was that bottleneckswould start to form in mid-2018.But according to Genscape, and reported on by Reuters, pipeline utilization in the Permian has jumped to 96 percent over the past month. Genscape says the Permian has 3.175 mb/d of pipeline, rail and local refining capacity combined. Thats a problem given that the EIA sees production jumping to 3.156 mb/d in April.That essentially means the pipelines are already close to being completely full, and the prices for oil from the Permian are starting to reflect that problem. Canadian oil producers have been suffering from painful discounts for their oil because of a lack of pipeline capacity, but now the Permian is running into a similar problem. On Wednesday, Midland light sweet crude traded at a $8-per-barrel discount relative to WTI.What the spreads are telling you is that these pipelines are full going to the Gulf Coast, Kendrick Rhea at energy consultancy East Daley Capital, told Reuters. The earliest possible relief will come from the Permian Express 3 pipeline, which could add 200,000 bpd of capacity by the end of this year.This is a serious problem for Permian drillers, who could be forced to slow growth or even shut down some operations if things get worse. That could have a significant impact on earnings.But there are broader ramifications for the global oil market. The assumption that the oil market would be well-supplied not only this year, but for years to come, is largely predicated on aggressive growth from U.S. shale generally, but also the Permian in particular. If Permian growth comes to a standstill this year, that will completely upend conventional wisdom about adequate supply.Two opposing forces in the Americas dominate our medium term forecast. In the early years, record-smashing US supply far outweighs collapsing Venezuelan capacity, keeping the world adequately supplied, the IEA wrote in its Oil 2018 report. The agency expects the U.S. to add 3.7 mb/d over the next five years.The IEA warned about a supply problem in the 2020s. But if the Permian does not add the enormous volumes that everybody thinks it will, the supply problems could arrive sooner than expected. To be sure, a series of pipeline projects could resolve the bottleneck, but several of them are not expected to come online until mid-to-late 2019.Join the conversation about this storyNOW WATCH: A neuroscientist explains why reality may just be a hallucination
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