Oil and gas producers working in the Permian Basin increased their 2020 oil basis hedge positions by 431% during the second quarter, a sharp uptick that may signal doubts about 2019 target dates for key pipeline projects, Wood Mackenzie analysts said Tuesday.

“It was an anomalously high trading volume” for 2020 Midland-Cushing (Mid-Cush) basis swaps during the quarter, said corporate research analyst Andrew McConn. “The only reasonable conclusion one can draw from this surge is that Permian producers are concerned that key pipeline projects won’t be completed on schedule.”

With oil production forecast to grow on average in the Permian by more than 400,000 b/d year/year through 2022, output has been overwhelming takeaway capacity and causing oil and gas to sell inside the basin at steep discounts to national indexes.

As recently as 2015, pipeline capacity constraints caused the Mid-Cush West Texas Intermediate discount to widen to $20/bbl, according to Wood Mackenzie researchers. “This has prompted many Permian operators to use derivatives to hedge against the risk of price differentials growing wider.”

According to a U.S. exploration and production (E&P) review by Goldman Sachs of all hedging completed during 2Q2018, operators overall only slightly increased their 2018 oil hedging, but 2019 still was near normal levels. Hedging activity of Goldman’s covered E&Ps was considered to be minimal at the end of June versus the end of March. Post-2Q2018, E&Ps were 52% hedged for oil, 3% above an equivalent 49% at the end of the first quarter. For 2019, hedging had climbed to 23% from 16% post-1Q2018 results.

Permian midstream operators have greenfield pipelines and expansions underway to ease congestion, but it could take more than a year before West Texas and southeastern New Mexico producers see sustained relief.

According to Wood Mackenzie estimates, current projects under construction via final investment decisions (FID) will not provide sufficient capacity until late 2019.

“The more than 52% increase in 2019 Mid-Cush hedge positions suggests that producers perceive risk for that year, as well,” McConn said. “Specifically, the risk that Midland oil prices don’t gradually rise and converge back to parity with the Cushing index — as futures markets currently imply.”

Infrastructure may have ceded the race with production this year, but a massive buildout in late 2019 could flip the script.

According to Wood Mackenzie’s latest North American crude markets short-term outlook, more than 2 million b/d of capacity is scheduled to come online beginning in late 2019/early 2020, which could send the basin into a temporary medium-term overbuild.

“As new pipelines flood the basin and excess capacity provides a cheaper route to the U.S. Gulf Coast market, Midland crude prices could shift from massive discounts to Cushing to slight premium pricing,” said senior analyst John Coleman, who handles North American crude oil markets at Wood Mackenzie.

“We forecast potential for approximately 1.5 million b/d of excess pipeline capacity in late 2020,” Coleman said. “This will have ripple effects on basin pricing for years to come with expected downward pressure on pipeline tariffs showing up in basin differentials well into the early 2020s.”