NEW YORK—The Diamond Pipeline has scrambled crude oil flows around the U.S. Gulf Coast and Midwest since it opened in December, cutting supply at the Cushing, Okla., hub and hammering Louisiana oil prices.

The line from Cushing, Okla. to Memphis, Tenn., a joint venture between Plains All American Pipeline LP and Valero Energy Corp., has dented volumes on the Capline system—the nation’s largest crude pipeline that runs from the Gulf to key refineries in the Midwest.

Prices for Gulf Coast crude grades traded in the Louisiana region have been hit hard. Light Louisiana Sweet (LLS) and Mars—the two main Gulf grades—crashed to six-month lows vs. U.S. crude futures. With lower demand for Louisiana crude supplies, the LLS grade in particular is more sensitive to export arbitrage economics and U.S. crude’s discount to Brent narrowed to the tightest in more than five months on Jan. 29.

“Those Capline flows could be backing out LLS barrels into the St. James area, causing more supply and putting pressure on prices,” Adam Bedard, CEO of Denver, Colo.-based ARB Midstream said.

The price for Mars, a medium sour grade, traded on Jan. 26 at a $1.10 per barrel discount vs. WTI crude futures, the weakest since June. Louisiana Light Sweet slipped to a $2.17 premium on Jan. 25, also the lowest since June.

The LLS grade is delivered into the hub in St. James, La., and Mars is deliverable at the Louisiana Offshore Oil Port (LOOP) facilities in Clovelly, La.

Volumes on Capline, once a major artery for imports and Gulf of Mexico crude used by U.S. Midwest refiners, have declined sharply as the U.S. shale boom pushed inland crude to the East Coast and Gulf Coast.

The line can carry as much as 1.2 million barrels of oil daily (bbl/d)from St. James, La., to Patoka, Ill., but has seen volumes further eroded by Diamond, which has capacity of up to 200,000 barrels, traders said.

Flows on the Capline trunk line have fallen from about 310,000 bbl/d in July to about 219,000 bbl/d in the week ended Jan. 19, while Diamond was just above 150,000 bbl/d in that week, according to data from energy intelligence and monitoring firm Genscape.

The 440-mile long Diamond line feeds Valero’s Memphis, Tennessee refinery, which has a capacity of about 190,000 bbl/d. Valero has historically moved large volumes from North Dakota’s Bakken shale region by rail to Louisiana and then shipped it up Capline, a long and expensive route, traders said.

In December, Marathon Pipe Line LLC said it would reverse Capline, pending agreement among owners, to initially send about 300,000 bbl/d of crude south beginning in second-half 2022. However, if supply is getting stuck in Louisiana as a result of Diamond, the additional crude from Capline could worsen that effect.

The Diamond start-up has helped draw down inventories in Cushing, traders said. Stockpiles declined by about 2.6 million barrels in the week to Jan. 26, according to Genscape on Jan. 29, traders who saw the data said.

U.S. crude’s discount to Brent hit $3.77 a barrel on Jan. 29, the tightest since Aug. 21. A wide spread between the two benchmarks incentivizes U.S. crude exports; the tightening may have made Gulf grades less attractive for overseas buyers.