Houston To Get Its Own Crude Oil

Intercontinental Exchange plans to launch later this quarter a crude oil futures contract of physically delivered Permian West Texas Intermediate (WTI), deliverable in Houston, as the city has become the pricing center for U.S. oil as production and exports continue to grow.

Subject to regulatory review, the crude oil futures contract will launch on ICE Futures U.S. in the third quarter, ICE said in a statement.

“The Houston delivery point has become the pricing center for U.S. crude oil production and exports, and the new flat price futures contract is designed to serve hedging and trading opportunities in this growing market,” the exchange’s statement reads.

“With the growth in shale oil production in the Permian basin in West Texas, which is now estimated at 2.8 million barrels a day, and increased U.S. exports alongside growing Asian demand for light sweet crude oil, Houston has become the central delivery point for U.S. crude. The ICE Permian WTI futures contract is designed to provide price discovery, settlement and delivery at Magellan Midstream Partners, L.P.’s (NYSE: MMP) terminal in East Houston,” ICE said.

Permian oil production is expected to hit 3.333 million bpd in July, and rise by another 73,000 bpd to reach 3.406 million bpd in August, according to the EIA’s latest monthly Drilling Productivity Report from July 16.

Over the past few weeks, U.S. crude oil exports have exceeded 2 million bpd each week, and hit a record-high of 3 million bpd in the fourth week of June.

“The U.S. Gulf Coast, with Houston as its trading hub, is the natural delivery point for a North American crude oil benchmark based on WTI from the Permian Basin,” said Jeff Barbuto, Vice President of Oil Markets at ICE.

“The recent price divergence between Cushing-based WTI and Brent is a reminder that although Cushing is a marker for local crude fundamentals in the midcontinent, it diverges for pricing waterborne U.S. crude. We are working with the market to provide a reliable and predictable quality specification and location that is relevant to global crude pricing, and accessible for domestic and foreign buyers alike,” Barbuto said.

“It’ll enable banks and other lenders to know where they stand on the value of Permian crude,” John Kilduff, partner at New York-based energy hedge fund Again Capital, told Reuters, commenting on the new oil futures launch.

Tsvetana Paraskova for OilPrice.com