S&P Global Platts' new waterborne USGC benchmark targets flaws in Cushing-based WTI

Houston — S&P Global Platts aims to set a new US crude benchmark after the historic NYMEX WTI negative pricing event in April that was triggered by landlocked storage concerns in Cushing, Oklahoma.

The new Platts American GulfCoast Select (AGS) launched on June 26 focuses on Permian Basin crude set for export and is designed to better reflect pricing after a hodgepodge of Houston-based or waterborne assessments released in the last few years never truly caught on.

The latest impetus to set a stronger benchmark for USGC crude came from the oddities of global oil price crash caused by the ongoing coronavirus pandemic and the Saudi-Russian pricing war. As crude storage volumes neared capacity in Cushing -- but not necessarily the rest of the US -- NYMEX WTI plunged all the way to minus-$37.63/b on April 20 just prior to the expiry of front-month pricing, which did not reflect the real value of crude oil outside of the landlocked storage hub.

Platts AGS will represent the value of waterborne light, sweet crude loading FOB US Gulf Coast, 15 to 45 days ahead. A key goal is to avoid such pricing distortions that sometimes arise from Cushing, which is more than 500 miles from Texas export hubs.

"After the WTI crude's historic plunge to negative territory, energy traders' frustration peaked with the dependence of oil delivery rules and storage capacity problems to a single location in Oklahoma," said Edward Moya, senior market analyst with OANDA. "Brent crude didn't have the same problem as WTI, and investors will welcome a US waterborne benchmark."

Energy traders and industry leaders have been moving away from traditional WTI pricing for years, said James West, an energy analyst with Evercore ISI.

"This is long overdue," West said. "We've viewed WTI as an outdated crude price benchmark for years. While Brent is also somewhat limited in its scope, it aligns better with most of the Middle East benchmarks."

After Congress lifted the United States' decades-old crude export ban at the end of 2015, US crude exports steadily surged from less than 500,000 b/d to more than 3.7 million b/d in February -- before steadily falling during the pandemic.

"Platts AGS at last brings the US market a Brent of its own," said Vera Blei, global director of oil at S&P Global Platts, in the announcement. "This new benchmark reflects the value of US crude oil that is on the water, internationally connected and free from the distortions of domestic infrastructure economics."

What's next?

The big question now is whether the new Platts AGS assessment will catch on and if the industry will rally around a new US benchmark. The push is to move the benchmark from Cushing -- the self-described pipeline crossroads of the world -- closer to Houston, which dubs itself the energy capital of the world.

Competing price reporting agency Argus Media launched a similar assessment on June 26, also called American GulfCoast Select. But Platts and Argus will use different methodologies amid the turf war between the top two pricing agencies.

Platts AGS will reflect light, sweet crude supplied from the Permian on specified, long-haul pipelines, including BridgeTex, Longhorn, Midland-to-ECHO I and II, Cactus I and II, EPIC, Gray Oak and Permian Express. Additional crude grades, such as from the Bakken Shale, may eventually be added to the Platts AGS basket based on market feedback. The new assessment will reflect a 0.2% sulfur limit, 75 ppm mercaptan limit and 38-44 API.

Platts AGS will apply to crude exports at Texas ports, such as Corpus Christi, Texas City, Houston, Beaumont and Nederland. The benchmark reflects cargoes loading in a 15-45 day window from the day of the assessment. This means that the June 26 assessment will reflect cargoes loading from July 11-Aug. 10.

The new Argus AGS will initially cover the Houston area, but is expected to expand to cover Corpus Christi, Louisiana and new sources of Midland-quality WTI, Argus said in its announcement. The Argus AGS index will publish as an outright price, but also as a differential to the Cushing contract to accommodate those that hedge using NYMEX futures.

Since the lifting of the crude export ban, there have been several attempts to better benchmark crude pricing from the USGC, including the CME Group's waterborne WTI Houston Crude Oil (HCL). But most of those assessments were based on prices at oil storage terminals, such as Enterprise Houston Ship Channel and Magellan East Houston. They're often quoted as premiums or discounts to NYMEX WTI, instead of a separate benchmark price.

It's still unknown whether traders will embrace the new Platts benchmark or lean toward different ICE Brent instruments that align closely with USGC crude export prices, said Sandy Fielden, director of oil research at Morningstar.

"By promoting this quote, they provide European and Asian traders a Platts assessment if they choose to trade at the Gulf Coast, making it easier for them to link to positions in physical Brent Dated or Dubai swaps markets," Fielden said. "But he challenge for any Gulf Coast waterborne assessment is that exports are going to compete with other grades in Europe or Asia and, in those markets, Brent and Dubai are more dominant and accepted instruments."