A new oil futures contract is coming to the Gulf Coast.

Magellan

Magellan Midstream Partners L.P., Enterprise Products Partners LP and Intercontinental Exchange Inc. (ICE) said Monday they would partner to create a contract for the physical delivery of crude in the Houston area.

The companies said the Midland WTI American Gulf Coast contract (ICE: HOU) is expected to launch in early 2022. They are developing the new offering in response to market demand for a Houston-based index with scale and flow assurance. Backers of the new contract said that, after the Cushing, Oklahoma West Texas Intermediate (WTI) contract traded into negative territory in April 2020 amid pandemic fallout, it became clear that the industry needed an alternative.

It “was a wake-up call to the oil industry that the storage constraints and landlocked location of the Cushing contract could no longer be ignored,” said Harold Hamm, Continental Resources Inc. chairman and founder of the American Gulf Coast Select Best Practices Task Force Association.

Hamm said he started the association to develop specifications for a new U.S. oil price benchmark on the Gulf Coast. “We think a futures contract in the most interconnected market center in the country, with a widely accepted quality” specification that “settles with guaranteed delivery of crude oil is an important new alternative for the industry.”

The quality specifications of the new futures contract will be consistent with WTI oil originating from the Permian Basin with common delivery options at either the Magellan East Houston terminal or the Enterprise Crude Houston terminal. In support of the new futures contract, Magellan and Enterprise said they expect to discontinue their existing provisions for delivery services under current contracts at each terminal once the new contract receives regulatory approval and is finalized.

“As the market hub for Permian Basin production, Houston represents the most logical choice for a new futures contract,” said Brent Secrest, chief commercial officer of Enterprise’s general partner. “Between Magellan and Enterprise, we offer access to virtually all of the export capacity in the Houston region, redundant connectivity to all area refineries, a robust Gulf Coast storage position and interconnects to all of the relevant supply pipelines, including those owned by third parties.”

Jeff Barbuto, ICE’s global head of oil markets, said the new futures contract will cover 4 million b/d of supply capacity from Midland into Houston and provide access to both domestic and foreign demand. It will also be linked to nearly 60 million bbl of storage capacity in the Magellan and Enterprise systems.

The new crude pricing point comes at a time when oil demand and prices are rebounding from the depths of the pandemic. WTI traded above $72/bbl Monday, up about 50% in 2021.

U.S. Energy Information Administration (EIA) data show that petroleum demand during the week ended June 11 – the most recent — jumped 16% week/week.

Over the four-week period ended June 11, consumption averaged 19.3 million b/d, up 17% from the same period last year, EIA’s Weekly Petroleum Status Report showed. In that same span, demand for gasoline averaged 9.1 million b/d, up 19%, distillate fuel averaged 4.0 million b/d, up 25%, and jet fuel averaged 1.3 million b/d, up 89%.

Globally, the Organization of Petroleum Exporting Countries said in a report this month it expects global oil demand to increase by about 6 million b/d in the second half of this year, exceeding supply growth. It cited mounting economic activity that is driving demand for transportation fuels across the United States, Europe and Asia.