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Pipeline reversal may be first step in stemming U.S. inland crude slump

NEW YORK, Aug 22 (Reuters) - The reversal of flow in a little-known pipeline this week may be a first step toward ending bottlenecks at Midland, Texas, that have kept crude prices there sharply discounted to those at Cushing, Oklahoma.

News of the switch for the 60,000 barrel-per-day (bpd) pipeline has already sharply narrowed the discount for WTI delivered at Midland to that at Cushing, the delivery point for the benchmark U.S. crude futures contract.

While it is just a small step in helping to move the ample volumes from the Permian Basin, the nation's fastest-growing oil patch, other pipelines should be added in the next few months, potentially easing the pressure on Midland prices further.

"The reversal is definitely a start, but it doesn't resolve all the Permian Basin takeaway problems," said Amrita Sen, chief oil analyst at Energy Aspects.

The Permian Basin has quickly become the nation's fastest growing oil patch with oil production on course to jump 38,000 bpd to 1.72 million bpd in September, according to the Energy Information Administration's drilling productivity report.

But infrastructure bottlenecks have held up its crude around Midland, pressuring prices there.

On Tuesday, the day Centurion Pipeline LP, a subsidiary of Occidental Petroleum Corp, informed authorities of the pipeline change, WTI crude at Midland <WTC-WTM> for September traded at a discount of $21.50 a barrel versus oil delivered at Cushing, just 500 miles away. It was the widest discount since Reuters began reporting the price in 1998.

By the end of the day, the discount had narrowed by around $5-6 a barrel. A day later, Midland gained even more and traded around $12 a barrel below WTI.

"We're expecting differentials to move back closer to the $6 to $7 range (a barrel) from now until the BridgeTex pipeline starts up, and then you'll probably see more of a jump," Sen said.

Magellan Midstream Partners LP's 300,000 bpd BridgeTex pipeline is set to start delivering oil from Colorado City, Texas, to the Houston area in September.

But market participants cautioned that this week's moves came at a volatile time for crude differentials.

On Friday, physical traders and refiners were trading the second of three roll trading days, where refiners, pipelines and traders adjust their crude slate after the expiration of the front-month U.S. crude contract.

A trading source said that differentials will likely remain unchanged at levels around $12 a barrel until 2015.

Sending oil from Midland to Cushing costs about $1 to $1.50 a barrel provided there is pipeline capacity available, and recently, some traders have been able to take advantage of the $15 to $20 a barrel premium.

But if the spread is any narrower than $6 to $7 a barrel, it may be worth pushing oil towards the Gulf Coast instead, which would cost some $2.50 to $4 a barrel, but could fetch a higher premium.

(Reporting By Catherine Ngai; Editing by Jessica Resnick-Ault, Andre Grenon and Ken Wills)