Rising U.S. Crude Oil Exports Boost Gulf Coast Benchmarks

By Arathy Somasekhar
HOUSTON (Reuters) – Rising U.S. crude oil exports are enhancing the prominence of Gulf Coast price benchmarks and increasing trading volumes on Houston contracts, reducing the importance of the Cushing, Oklahoma storage hub.

Since U.S. WTI Midland crude oil transactions were included in the dated Brent price assessment a year ago, U.S. oil exports have outshined Cushing’s role as a storage and pricing hub, according to traders and analysts.

Cushing has served as the delivery and pricing point for West Texas Intermediate (WTI) crude futures on the New York Mercantile Exchange (NYMEX) since 1983. The benchmark prices major U.S. crude grades for physical delivery, trading at a differential to WTI.

However, after the U.S. lifted its crude export ban in 2015 during a shale boom that established the country as the world’s top producer, both the Intercontinental Exchange (ICE) and CME Group launched contracts for trading and delivering crude from Midland, Texas, to Houston terminals.

Average daily volumes on CME’s WTI Houston contract more than doubled in September, reaching a record high year on year, as reported by the exchange.

An all-time high of over 18 million barrels were delivered against ICE’s HOU contract, compared to less than 10 million barrels in August last year.

Increased liquidity in these contracts will create opportunities for hedging and arbitrage trades, resulting in more deliveries to storage terminals in the Gulf Coast and fewer to Cushing, according to oil market experts.

“The physical market for U.S. production has already moved to the U.S. Gulf Coast, and now the futures market is following suit,” said Jeff Barbuto, global head of oil markets at ICE.

Shale oil output from the Permian basin in Texas and New Mexico, the largest U.S. oilfield, has surged 3.6% to average 6.1 million barrels per day this year, with most of that oil going to storage near Gulf Coast export ports or refiners in the region.

“Where the big trade flow of crude oil is from the Permian and comes across to Houston, it kind of bypasses Cushing,” added Colin Parfitt, a vice president at Chevron.

CME maintains that WTI remains the most liquid and significant benchmark, with the Gulf Coast emerging as an important and growing market.

Gulf Coast inventories stood at roughly 235 million barrels last week, about 7% higher than levels at the beginning of 2016 after the export ban was lifted. Cushing storage rebounded from 11-month lows to 22.8 million barrels last week but was about 64% lower than levels at the start of 2016.

“If someone were to say a year ago that Cushing stocks would be at rock bottom, you would think oil would be at $100,” remarked James Cordier, founder of Cordier Commodity Report. The U.S. benchmark traded below $70 a barrel on Thursday.

Coastal Prices Dominate

The leading price benchmark along the Gulf Coast, especially for exports, is WTI at East Houston (MEH), which represents WTI arriving via pipeline and traded at the Magellan’s East Houston terminal.

“U.S. exports are around 4 million barrels a day and Midland priced at East Houston is essentially the barometer for U.S. exports,” stated Jeremy Irwin, senior oil markets analyst at Energy Aspects.

“I don’t see any incentive to necessarily store barrels at Cushing,” Irwin continued. “What Cushing becomes is more of a flow-through hub, rather than a storage pricing hub.”

Oil basins feeding Cushing have also lost their luster, with U.S. crude output growth from secondary shale oil basins in North Dakota, Pennsylvania, Ohio, and West Virginia slowing, as they previously filled Cushing’s extensive storage capacity. Canada’s Trans Mountain pipeline expansion has also diverted some crude oil that would have flowed to Cushing.