Rising unconventional oil production combined with the 2015 lifting of restrictions on US crude exports is changing the way light, sweet crude oil is traded and priced worldwide.
Cushing, Okla., is the delivery point for a liquid oil futures contract. But much of the nation’s unconventional oil production now goes directly to the Gulf of Mexico coast for export to Europe, Latin America or Asia—entirely bypassing the Cushing hub.
Energy economist Phillip K. Verleger of PKVerleger LLC of Denver notes West Texas Intermediate (WTI) is quoted for delivery both in Cushing and in Houston.
Prices for WTI Houston has diverged from WTI Cushing since August, Verleger said, adding it’s unclear why this is happening.
“The flow of oil into Cushing could have increased while capacity to move oil south did not,” Verleger said. It’s also possible demand by refineries for oil from the Cushing hub might have declined.
Refineries traditionally served by Cushing could turn toward regional supplies such as the Permian basin in Texas or North Dakota or Canada, he said.
“Either way, oil is bottled up in Cushing,” which is depressing WTI Cushing prices, Verleger said. He suggests Houston WTI is becoming more representative of US crude prices.
Traders, producers, and others trying to hedge price risk are watching the differential between CME Group’s WTI futures based at Cushing and the Argus Media price for physical WTI at Houston.
Meanwhile, producers looking to export crude are apt to look at Houston as the pricing point. Verleger expects the Houston WTI benchmark to be successful for at least several years because of storage capacity associated with the contract and climbing US oil exports.
The Houston WTI price is quoted at Magellan Midstream Partners LP’s East Houston terminal, where storage capacity was 7.2 million bbl as of May 2017.
The Energy Information Administration reported 1.858 million in US crude oil exports as of Dec. 15, 2017.
Important benchmarks
S&P Global Platts reports the three most important crude benchmarks are Brent, WTI, and Dubai-Oman. The prices of Dubai ad Oman crudes, both medium sour, often are used to price crude oil produced in the Middle East and exported to Asia.
“The need for a crude benchmark on the [US] Gulf Coast has been a subject of much discussion over the years,” Platts said. The Gulf Coast is a key production area and home for various refineries.
Most US crude sales continue to be priced off WTI at Cushing, which was chosen as the delivery point for New York Mercantile Exchange light, sweet crude futures in 1983, Platts said.
The Louisiana Offshore Oil Port (LOOP) announced on July 24, 2017, that it will offer exports sometime during early 2018. LOOP, a very large crude carrier port, is the only US VLCC port.
Export capabilities primarily will affect trade flows of medium-sour crude along the Gulf Coast.
“Not only will companies be able to more efficiently take advantage of arbitrage opportunities for this type of barrel, [but] having both inflows and outflows from the system will likely enhance price discovery in the region,” S&P Global Platts said.
“This change; however, is unlikely to have a significant impact on light, sweet barrels. With production from the highest growth shale plays largely reaching ports in Texas, reverse lightering is likely to remain a popular option for exporting these barrels,” S&P Global Platts added.
