Analysis-US Gulf Coast oil prices to take center stage as exports dominate By Reuters

By Arathy Somasekhar

HOUSTON (Reuters) – Rising oil exports are boosting benchmark prices on the Gulf Coast and increasing trading volumes in Houston contracts, eroding the importance of the storage hub in Cushing, Oklahoma.

Since U.S. WTI Midland crude trading joined the price review dated a year ago, U.S. oil exports have overshadowed Cushing’s role as a storage and pricing center, traders and analysts said.

Cushing has been the delivery and pricing point for West Texas Intermediate (WTI) crude oil futures on the New York Mercantile Exchange (NYMEX) since 1983. The benchmark is currently used to price major US crudes for delivery physical, trading at a differential to WTI. .

However, shortly after the U.S. lifted its ban on crude oil exports in 2015 amid a shale boom that turned the country into the world’s largest producer, both the Intercontinental Exchange (NYSE: ) and CME Group (NASDAQ :), which owns NYMEX, launched contracts to trade and deliver crude oil from Midland, Texas, to terminals around Houston.

Average daily volume of the CME WTI Houston contract has doubled so far in September to a record year-over-year level, the exchange said.

An all-time high of more than 18 million barrels was delivered against ICE’s competing HOU contract, compared with less than 10 million barrels last August, ICE said.

Increased liquidity in these contracts will create opportunities for hedging and arbitrage, leading to more deliveries to the region’s storage terminals and less to Cushing, oil market experts said.

“The physical market for US production has already moved to the US 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, rose 3.6 percent to an average of 6.1 million barrels per day (bpd) through this year, much of that oil is headed for storage closer to the Gulf Coast. export ports or to refineries in the region.

“Where the big commercial flow of crude is from the Permian and gets to Houston, it kind of bypasses Cushing,” said Colin Parfitt, vice president at Chevron (NYSE: ).

CME said WTI continues to be the most liquid and meaningful benchmark and that the Gulf Coast is an important and growing market.

Gulf Coast inventories were about 235 million barrels last week, about 7 percent higher than levels since early 2016 after the export ban was lifted.

Cushing stockpiles fell to an 11-month low of 22.8 million barrels last week, near operational lows, and were about 64 percent lower than early 2016 levels.

“If someone said a year ago that Cushing (stocks) would bottom out, you’d think oil would be at $100,” said James Cordier, founder of the Cordier Commodity Report think tank. The US benchmark traded below $70 a barrel on Thursday.

COASTAL PRICES RULE

The reference benchmark price along the Gulf Coast, particularly for export, is WTI at East Houston, also known as MEH, as it represents WTI arriving via pipeline and traded at the Magellan East Houston (MEH) terminal.

“U.S. exports are around 4 million (barrels) a day, and the Midland price at East Houston is really the barometer for U.S. export prices,” said Jeremy Irwin, senior oil markets analyst at researcher Energy Aspects.

“I don’t see any incentive as to why you would necessarily want to store barrels at Cushing,” Irwin said. “What Cushing is becoming is more of a flow hub than a storage price hub.”

The oil pools that feed Cushing 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 hundreds of Cushing’s storage tanks.

The expansion of Canada’s Trans Mountain pipeline also siphoned off some of the crude oil that would have flowed into Cushing.