Analysis: US Gulf Coast Oil Prices to Take Center Stage as Exports Dominate – Reuters

By Arathy Somasekhar

Rising oil exports are enhancing the significance of Gulf Coast price benchmarks, while trading volumes in Houston contracts are increasing, diminishing the importance of the Cushing, Oklahoma, storage hub.

Over the past year, the inclusion of U.S. WTI Midland crude oil transactions in the dated price assessment has shifted the focus away from Cushing’s role as a storage and pricing center, according to traders and analysts.

Since 1983, Cushing has served as the delivery and pricing point for West Texas Intermediate (WTI) crude futures on the New York Mercantile Exchange. This benchmark is widely used to price major U.S. crude grades for physical delivery, typically trading at a differential to WTI.

However, following the U.S. lifting its ban on crude exports in 2015 amid a shale boom that positioned the country as the top global oil producer, the Intercontinental Exchange and CME Group, which owns NYMEX, introduced contracts to trade and deliver crude from Midland, Texas, to Houston terminals.

In September, average daily volumes on CME’s WTI Houston contract more than doubled year-on-year, reaching record highs. Additionally, more than 18 million barrels were delivered against ICE’s HOU contract in September, a significant increase from less than 10 million barrels in August of the previous year.

The growing liquidity in these contracts is expected to create new opportunities for hedging and arbitrage trades, resulting in increased deliveries to storage terminals in the Gulf Coast region, while reducing shipments 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," stated Jeff Barbuto, global head of oil markets at the Intercontinental Exchange.

The surge in shale oil output from the Permian Basin in Texas and New Mexico—a major U.S. oilfield—has risen 3.6% this year to an average of 6.1 million barrels per day, with much of this oil directed toward storage closer to Gulf Coast export ports or to refiners in the region.

Colin Parfitt, a vice president at Chevron, noted, "The significant trade flow of crude oil from the Permian is bypassing Cushing entirely and heading straight to Houston."

CME has indicated that while WTI remains the most liquid and vital benchmark, the Gulf Coast market is becoming increasingly significant.

Gulf Coast inventories recently stood at approximately 235 million barrels, about 7% higher than at the beginning of 2016 when the export ban was lifted. In contrast, Cushing’s storage, which recently rebounded from 11-month lows to 22.8 million barrels, is around 64% lower than levels recorded in early 2016.

James Cordier, founder of the Cordier Commodity Report, commented, "If someone were to say a year ago that Cushing stocks would be at rock bottom, you would think oil prices would skyrocket," referring to current U.S. benchmark prices being traded below $70 a barrel.

The primary price benchmark for Gulf Coast exports is WTI at East Houston, also known as MEH, reflecting 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 gauge for pricing U.S. exports," explained Jeremy Irwin, senior oil markets analyst at Energy Aspects. He added, "There’s little incentive to store barrels at Cushing; it is becoming more of a flow-through hub rather than a storage pricing hub."

Additionally, oil basins supplying Cushing have experienced a decline in productivity. Growth in U.S. crude output from secondary shale oil regions in North Dakota, Pennsylvania, Ohio, and West Virginia has slowed, reducing the volumes that previously filled Cushing’s vast storage facilities.

Moreover, the expansion of Canada’s Trans Mountain pipeline has drawn away some of the crude oil that would typically flow to Cushing.