Intercontinental Exchange Inc. (ICE) said Tuesday it plans to launch a physically delivered Permian West Texas Intermediate (WTI) crude oil futures contract in Houston.
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,” ICE management said.
The contract, with regulatory approval, would launch on ICE Futures U.S. by the end of September.
“With the growth in shale oil production in the Permian Basin in West Texas, which is now estimated at 2.8 million b/d, 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,” said ICE, the parent of the New York Stock Exchange.
The ICE Permian WTI futures contract is expected to “provide price discovery, settlement and delivery” at Magellan Midstream Partners LP’s terminal in East Houston.
“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 ICE’s Jeff Barbuto, vice president of oil markets. “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.
"A coastal pricing point for U.S. light sweet crude will be much more relevant in coming years as the U.S. crude export story continues to unfold with export markets and coastal pricing becoming more of a focus for U.S. crude producers,” said Wood Mackenzie’s John Coleman, senior analyst for North American crude oil markets. The research firm is estimating Lower 48 production will exceed 11 million b/d by 2023, positioning the United States to become the world’s largest oil producer.
U.S. production growth and increased exports, as well as demand growth in Asia for light sweet crude oil, means “Houston has become the central delivery point for U.S. crude,” said the Wood Mackenzie expert. “As U.S. producers and midstream operators assess their portfolios, questions about specific crude streams will arise as they assess which are most attractive to international buyers, and which export hub is best positioned to not only reach the right markets, but to handle the highest volumes.”
The new ICE contract “will allow producers to hedge production relative to coastal prices which are much more relevant for producers looking to export their crude," Coleman said. "With export volumes expected to surpass 1.5 million b/d by 2025, substantial pipeline interconnectivity with major crude producing regions like the Permian and the Eagle Ford, and direct connections with the current benchmark pricing hub in Cushing, OK, Houston is a natural point for a coastal pricing hub."
About one-half of the world’s oil and refined futures are traded on ICE’s markets, including futures and options on the global benchmark ICE Brent and WTI.