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Page added on July 17, 2018

Houston Is a Big Energy Hub, So Why Not Price Oil Futures There?

Houston is set to get its own oil futures, a sign of the city’s growing importance as the U.S. sends more crude abroad.

Intercontinental Exchange Inc. ICE 0.66% is planning a new crude futures contract with physical delivery in Houston, the company said Tuesday. The contract will provide traders with direct access to Houston prices. The exchange is aiming to launch this quarter, subject to regulatory review.

For decades, the benchmark for U.S. oil prices has been in Cushing, Okla., because of its accessibility through major pipelines and extensive storage space. However, with the U.S. on track to become a major energy exporter, some analysts say that pricing power is shifting to the Gulf Coast, where oil gets loaded onto tankers and shipped overseas.

“Houston’s become the main trading hub,” said Jeff Barbuto, vice president of oil markets at ICE. “It’s a better representation of the economics of where U.S. crude production meets the water to be exported.”

U.S. exports of crude oil have surged since a 40-year-old ban was lifted in 2015. In June, crude exports reached a record high of 3 million barrels a day, and have since stayed at about 2 million barrels a day. Meanwhile, U.S. shale companies are producing at record levels of 10.9 million barrels a day.

Right now, those who want to trade Houston prices use futures that track Cushing prices and contracts that track the difference between the two locations. An outright Houston contract could help streamline the process for traders and companies looking to lock in prices for their crude.

“This will help our customers through the process of hedging their risk around those differentials,“ said Mark Roles, vice president of commercial crude oil at Magellan Midstream Partners LP, whose East Houston terminal will act as the settlement and delivery point for the new contract. “As more volumes hit the international market, we’re going to see a much stronger need for pricing and hedging,” he said.

Several times this year, Cushing prices were influenced by logistical issues, creating headaches for producers, said John Coleman, an analyst at energy consultancy Wood Mackenzie.

“There’s a lot of guesswork that goes into factors impacting Cushing,“ Mr. Coleman said. “A coastal-based contract is going to be much more relevant in selling crude into the global market.”

Houston may also start competing with other major export locations such as Corpus Christi, analysts said, as more infrastructure is built out to ship crude overseas.

The plans for a Houston futures contract come at a time when regional prices are splintering. A lack of pipelines and workers have depressed prices in Midland, Texas, as crude supply is unable to get out. As of Friday, Midland prices were $8.44 a barrel below where U.S. oil futures based on Cushing prices closed. Meanwhile, Houston prices are currently trading $4.77 above Cushing.

New futures contracts regularly face hurdles in garnering enough traction and liquidity to compete with other well-established products. Many doubt that trading off Houston prices will quickly overtake that of Cushing.

“The old guard may be slow to shift into a new pricing dynamic,” Mr. Coleman said.

In 2016, CME Group launched futures contracts that track the difference between Houston and Cushing prices—allowing market participants to hedge their exposure to gaps. Combined open interest on such products between ICE and CME has steadily risen to more than 180,000 contracts, more than double last year’s level. ICE and CME are the two dominant players in the oil futures market.

Escalating trade tensions between the U.S. and China could also derail the trend of growing exports, and undermine the emphasis on Houston pricing, said Philip Verleger, an energy economist.

“China is one natural market for U.S. crude,“ Mr. Verleger said. “The trade war that’s been started by Trump could cause some problems initially.”

WSJ

70 Comments on "Houston Is a Big Energy Hub, So Why Not Price Oil Futures There?"

dave thompson on Tue, 17th Jul 2018 2:24 pm

This article is complete BS. The US is a net crude importer. The stuff that they want to export no one wants. Unless it is refined products.

Anonymouse1 on Tue, 17th Jul 2018 2:44 pm

Exactly dave, the uS is a NET IMPORTER of just about *everything* energy wise. It imports:

-Electricity
-Natural Gas
-Oil (and lots of it).
-Uranium and other radioactives.

About the only thing the amerikan empire does not import (afaik), is raw coal.

Without energy imports from its colonies, the amerikan empires, War-Handgun-HFCS-Wall ST economy would shrink drastically, and likely collapse entirely. To mention nothing of its global empire of bases and puppet states.

So wtf is it with all the retards in the uS dis-information sphere going on about, that the uS is about to become some sort of energy-exporting juggernaut? Is it just wishful thinking? An in-ability to do things like basic math? Or is just the collective insanity of the amerikan empire, and their scribblers, as it crawls towards inevitable collapse?

MASTERMIND on Tue, 17th Jul 2018 2:50 pm

make sure to purchase a copy of the Wall Street Urinals lead energy writers book about fracking called “The Boom”..

MASTERMIND on Tue, 17th Jul 2018 4:15 pm

In the next crash the US dollar will be crushed..

https://twitter.com/LukeGromen/status/1018920184437002241

twocats on Tue, 17th Jul 2018 4:33 pm

wow. this article is stupendously tone-deaf – houston already has a great history as an energy trading hub – it was called Enron.

MASTERMIND on Tue, 17th Jul 2018 4:54 pm

Lights go out at White House as Trump pledges loyalty to US intelligence

https://www.rt.com/usa/433539-lights-go-out-secret-services/

I knew this whole war against the deep state was fake..just red meat for his ignorant base..He does what he is told..He is the deep state/Israels bitch..