Magellan, Enterprise team up with ICE for new Houston crude futures contract

Magellan Midstream Partners and Enterprise Products Partners teamed up with the Intercontinental Exchange to establish a new oil futures contract on Permian Basin crude delivered to Houston to make the US Gulf Coast hub more competitive against NYMEX WTI and crude exports from the Port of Corpus Christi.

ICE expects to launch the new contract announced June 21 in early 2022 to provide the markets a Houston-based index with "greater scale, flow assurance and price transparency."

Competitors Magellan and Enterprise both own major Houston storage and export hubs, but they decided to team up this year on creating a joint futures contract in the aftermath of the historic negative crude pricing event in April 2020, and after the Port of Corpus Christi overtook the Houston Ship Channel as the country's top crude-exporting location.

The new contract is called the Midland WTI American Gulf Coast contract (ICE: HOU).

Calls for alternatives to NYMEX WTI pricing have persisted since the April 2020 pricing event out of concerns of the landlocked nature of Cushing, Oklahoma market center. S&P Global Platts responded first with the Platts American GulfCoast Select (AGS) launched nearly a year ago, and competitor Argus quickly followed with another alternative.

Magellan and Enterprise said the quality specifications of their new futures contract will be consistent with West Texas Intermediate crude originating from the Permian, with common delivery options at either the Magellan East Houston terminal or the Enterprise Crude Houston terminal, called MEH and ECHO, respectively. Magellan and Enterprise said they will discontinue their existing provisions for delivery under current futures contracts once the new contract receives regulatory approval and is finalized.

The companies also worked with Continental Resources founder Harold Hamm and his American Gulf Coast Select Best Practices Task Force Association that was formed after April 2020 and during the pandemic's global crude oil demand collapse. That task force also worked with Platts and Argus on their offerings.

Houston ideal location

Jeff Barbuto, ICE's global head of oil markets, said partnering with Magellan and Enterprise allows ICE to offer the industry a futures contract with more than 4 million b/d of supply capacity from Midland into Houston, access to both domestic and foreign demand, and nearly 60 million barrels of storage capacity in the Magellan and Enterprise systems.

Magellan and Enterprise said Houston is the ideal location for the new futures contract, as opposed to anything out of competing Corpus Christi.

"As the market hub for Permian Basin production, Houston represents the most logical choice for a new futures contract," said Enterprise chief commercial officer Brent Secrest. "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."

NYMEX owner CME Group declined to comment specifically on the new ICE contract, but said NYMEX WTI remains the market's choice for managing crude oil exposure, and that Cushing is the "most robust network of pipelines and storage terminals for the global crude oil market."

Port of Corpus Christi CEO Sean Strawbridge said his port is the preferred gateway for US crude exports with more than a 55% market share because of the better crude qualities and competitive infrastructure.

"Recognizing price transparency lends to lower contract risk and market certainty, we understand why two competitors such as Magellan and Enterprise are teaming up to compete with Corpus Christi," Strawbridge said.

Greater Permian volumes are expected to flow to Houston by the end of 2021 after the ExxonMobil-led Wink to Webster crude pipeline comes online. Likewise, Enterprise continues to develop its deepwater Sea Port Oil Terminal export hub, called SPOT, offshore of the Houston Ship Channel with Chevron as the anchor customer.

Pricing impacts

In terms of pricing, tight arbitrage economics for US crude in recent weeks has added pressure on the differential for WTI crude at MEH.

On June 18, WTI MEH was assessed at a 40 cents/b spread to cash WTI, the weakest assessment for front-month WTI MEH since April 13, 2020, when the grade was assessed at a 20 cents/b discount to cash WTI. By comparison, the assessed differential for WTI MEH averaged $1.37/b through the first quarter, while thus far through the second quarter, WTI MEH has averaged a 79 cents/b premium to cash WTI.

The recent pressure on the grade comes as arbitrage economics for US crude has eroded. The Brent/WTI swaps spread, one indicator used to track the overall competitiveness of US crude on the international market, has averaged just $2.09/b through June, down from an average of $2.97/b through the first five months of 2021. As the swaps spread narrows, WTI-based crudes are generally seen as less competitive than their Brent-based counterparts.

Through the first five months of 2021, US exports of WTI crude, including direct-from-Permian Midland-spec WTI, averaged 1.72 million b/d, according to data from Kpler, down from about 2 million b/d just before the coronavirus pandemic.

Meanwhile, the spread between WTI crude in Midland, Texas, and on the USGC at MEH has remained rangebound around 40 to 60 cents/b since the fourth quarter of 2020 as an overbuild of Permian-direct pipelines has caused takeaway capacity to far exceed production levels in the basin, not even counting the new Wink to Webster system, where shipping rates have hit as low as 42 cents/b.