By Arathy Somasekhar
HOUSTON (Reuters) – Rising oil exports are raising the profile of Gulf Coast price benchmarks and boosting trading volumes on Houston contracts, eroding the significance of the storage center in Cushing, Oklahoma.
Since U.S. WTI Midland crude oil trades became part of the dated price review a year ago, U.S. oil exports have overshadowed Cushing’s role as a storage and pricing hub, traders and analysts said.
Cushing has been the delivery and pricing point for West Texas Intermediate crude futures (WTI) on the New York Mercantile Exchange (NYMEX) since 1983. The benchmark is currently used to price key US crude grades for physical delivery, trading at a differential to WTI. .
However, not long after the US lifted the ban on crude oil exports in 2015, amid a shale boom that made the country the world’s largest producer, both the Intercontinental Exchange (NYSE:) and the CME Group ( NASDAQ:), owner of NYMEX, contracts for the trading and delivery of crude oil from Midland, Texas, to terminals around Houston.
Average daily volumes on CME’s WTI Houston contract have more than doubled so far in September to a record year-over-year high, the exchange said.
A record high of more than 18 million barrels was delivered under ICE’s competitive HOU contract, up from less than 10 million barrels in August last year, ICE said.
Increasing liquidity in these contracts will create opportunities for hedging and arbitrage transactions, leading to more deliveries at storage terminals in the region, and fewer at Cushing, oil market experts say.
“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 the Intercontinental Exchange (ICE).
While shale oil production from the Permian Basin in Texas and New Mexico, the largest U.S. oil field, is up 3.6% so far this year to an average of 6.1 million barrels per day (bpd), much of it of that oil to storage closer to the Gulf Coast. export ports or to refineries in the region.
“Where the major trade flow of crude comes out of the Permian and goes to Houston, it more or less bypasses Cushing,” said Colin Parfitt, vice president at Chevron (NYSE:).
CME said WTI remains the most liquid and significant benchmark and that Gulf Coast is an important and growing market.
Gulf Coast inventories stood at about 235 million barrels last week, about 7% higher than levels at the start of 2016, after the export ban was lifted.
Cushing storage bounced off an 11-month low last week to 22.8 million barrels, near operating minimums, and was down about 64% from early 2016 levels.
“If someone said a year ago that Cushing (stock) was at an all-time low, you would think the price of oil would be at $100,” said James Cordier, founder of think tank Cordier Commodity Report. The US benchmark traded below $70 per barrel on Thursday.
COASTAL PRICES DOMINATE
The primary price benchmark along the Gulf Coast, especially for exports, is WTI at East Houston, also known as MEH, because it represents WTI arriving by pipeline and traded at Magellan’s East Houston (MEH) terminal.
“U.S. exports are around 4 million barrels per day and the Midland price in East Houston is really the barometer for pricing U.S. exports,” said Jeremy Irwin, senior oil market analyst at researcher Energy Aspects.
“I don’t see any reason why you would necessarily want to store barrels in Cushing,” Irwin said. “What Cushing is becoming is more of a flow hub than a storage pricing hub.”
Oil basins that feed Cushing’s have also lost some of their luster. Growth in U.S. crude oil production from secondary shale oil basins in North Dakota, Pennsylvania, Ohio and West Virginia has slowed. Historically, they helped fill Cushing’s hundreds of storage tanks.
The Canadian expansion of the Trans Mountain pipeline has also siphoned off some of the crude oil that would have flowed to Cushing.
