articles Corporate /en/research-insights/articles/the-essential-podcast-episode-17 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List
Podcast

The Essential Podcast, Episode 17: The Collapse of Cushing – April 20th and the U.S. Oil Market

S&P Global

Daily Update: October 13, 2020

S&P Global

Daily Update: October 9, 2020

S&P Global

Daily Update: October 8, 2020

S&P Global Platts

Alaska oil output tax proposal puts state’s future production at risk Fuel for Thought


The Essential Podcast, Episode 17: The Collapse of Cushing – April 20th and the U.S. Oil Market

About this Episode

How did a small town in Oklahoma and a group of inexperienced oil traders nearly sink the U.S. oil market and drive the price of oil to a point where it was cheaper than free? Dave Ernsberger and Richard Swann of S&P Global Platts join the Essential Podcast to explain what went wrong on April 20th and how a new benchmark for U.S. crude can integrate effectively with the global market.

Listen and subscribe to this podcast on Apple Podcasts, SpotifyGoogle Podcasts, Deezer, and our podcast page

Show Notes

Listen to our previous episodes on the volatility of the oil market: Making Sense of Oil Markets and Oil Demand Part Deux – Prices Under Water.

Transcript

Nathan Hunt:  Welcome to the Essential Podcast from  S&P Global. My name is Nathan Hunt. For the last few months, the US Crude market has behaved like a toddler strung out on candy, two hours past bedtime. Back in April crude markets dropped into negative territory for the first time. Well, the breakdown of OPEC plus negotiations played a role and a drop in demand due to Coronavirus lockdowns arguably played a bigger role, it was longstanding inefficiencies in the structure of the US crude market that reduced black gold to a hot potato to understand more about how this happened and what is being done to them. Avoid a repetition I'm joined today by Dave Ernsberger, global head of pricing and market insight and Richard Swann, editorial director for America's oil markets. both from S&P Global Platts. 

Dave Ernsberger: Thank you, Nathan. It's great to be here. 

Richard Swann: Good morning, Nathan. Great to be with you. 

Nathan Hunt: So just to dive right in, to understand the need for a new crude benchmark in the US let's start in Oklahoma. Tell me about the town of Cushing, Oklahoma. How did a town of just under 8,000 people come to play such a huge role in oil markets?

Dave Ernsberger: Oklahoma and Cushing, Oklahoma has long made an industry out of being home, the tank farms and pipelines and pipeline crossings and storage, location of choice for crude oil in the inner workings she's of the United States of America. And to its credit, it has a vast amount of oil storage, 80 million barrels or so of oil storage. And for decades now, it has served as a reasonably efficient locust for all things hurt oil pricing, storage, distribution, and so on. What's come to light though, since the US oil industry has changed over the last nine years is what was so much to its benefit became its Achilles heel through all the transformation and change that came with surging, sale production and surging exports. It is so far away from the coast. It is so far away from refining centers on the Gulf Coast and other parts of the US things that didn't matter before are hugely problematic now. And to your point about the negative pricing, we saw just very briefly on that the location of Cushing, which was so much its value proposition became the dead weight that dragged these prices down to minus $40 a barrel.  The fact that Cushing is so far away from basically everything else it served as because of its vastness and its openness and its, its willingness to take investment in tank infrastructure. It served a purpose, but that purpose is now moved on.

Richard Swann: It's really interesting the way you set that up. Now, I think you're right about why is the town in Oklahoma so important, but you need to always remember commodity markets that they're incredibly physical things, right? People are buying and selling crude oil all over the world in all sorts of different locations. What is critical though is that the prices are linked in all these different locations and what this town of Cushing has done quite well for most of its history for decades, as Dave was talking about is it's been the heart of the pricing mechanism for the price. So prices in the rest of the US whether that's Canada, North Dakota, Alaska, obviously the Gulf of Mexico and Texas have looked. They've looked at the cushion and used Cushing as the basis of their price. And then you can, you can add on a premium or take off a discount because of quality and location, but they ride up and down with Cushing and by and large, that works well. And when that's working, then there's other, the fundamentals you're talking about like coronavirus has hit oil demand. Of course. OPEC plus countries taking hugely significant action on international suppliers, crude oil, they would play out in the price. The problem is Cushing has got disconnected. As Dave's talking about from those physical flows. It's no longer representative of those flows. And when the price at Cushing doesn't accurately reflect the broader fundamentals, it's simply not working as a benchmark at that point. So, if you were down on the Gulf coast and you're using a cushion as a price reference, well, in reality, the value of your commodity down in Texas is going up and down with OPEC. It is going up and down with coronavirus, hitting jet fuel demand, and all the other old products. But actually, your contracts are tied back to Oklahoma and Oklahoma is going crazy.

Nathan Hunt: So there are actual cases to the crude market, that a lot of people don't understand most of the activity isn't just a simple matter of I give you money and you give me oil. I was wondering if you could talk a bit about how futures contracts work in crude markets?

Dave Ernsberger: There are two kinds of futures contracts, Nathan, and it's important for folks to always be aware of what they're buying before they buy and that's part of the story of what happened on April 20th in. S,o BTI futures, some futures are purely financially settled against the reference price and that reference price will typically be the value of the physical market. And then some futures contracts have an option for physical settlement or even a requirement for physical settlement and physically delivered futures contracts, which is what the NYMEX WTI contract is, are particularly susceptible, particularly beholden to the efficient, effective functioning of the physical mechanism. If you look at Brent futures contracts, as an example of financially settled, There was no disruption to that futures contract by problems in any kind of physical delivery mechanism. And actually, the Brent physical mechanism worked pretty well this year, too, by the way. But because there were problems in the physical mechanism for WTI crude oil, those problems instantly blew up in them, in the futures contract and left a lot of people high and dry and stranded and pretty desperate. The fact that in NYMEX WTI features, the design is you have to deliver oil or take the oil on expire. If you have an open position, that's a kind of a unique feature that makes it, you know, really kind of a, an unusual animal out there and as part of what happened.

Nathan Hunt: Just a followup question, I've talked to a lot of experienced oil traders to try to understand what happened in April. A lot of what they attributed the negative oil prices to were perhaps less-experienced traders involved in ETF funds who were not keeping an eye on the physical side to the market. Does that ring true to you? 

Dave Ernsberger: The success of any futures contract can be in part determined by how many different kinds of people get involved in the diversity participation in the market. But it seems like there were a lot of people trading NYMEX WTI futures in March who didn't seem to realize that we're going to have to do delivery in April or take delivery. And that's part of what, I mean, you can call it an experience. You can call it poorly prepared, but there seemed to be a lot of people who woke up and said, what do you mean I got to take delivery of oil.

Richard Swann: The physical delivery component is not to be underestimated. And actually, you've got folks trading futures, contracts, successful futures contract like this has financial investors from companies who have, I never touched a drop of real oil in their lives and never will. That's not what they do. This is a financial investment but if they get too close to the expire and they're carrying interest and it has a physical delivery, the opponent is something that gets very scary, very quickly. Now there are questions to be blunt for the administrator of the contract around that because typically in exchange, we'll be aware of net positions and as you approach expiry, they will talk individually to the holds of those positions to find out how they intended to close them out. There are questions probably to be asked there, but this is when the two worlds collide. This is the danger, right? You've got companies who never, ever we're going to take physical oil. So what have you got to do? You've got no choice, but to sell it on the back on the exchange. Clocks ticking, getting near expiring people can see storage is full. Who's going to buy it from you? Nobody. And of course, you're trading here. This isn't a physical world, necessarily. This is a world full of like autumn, you know, automated trading facilities and algorithm trading and things. And when you get that weakness in the market where you have a hugely motivated seller, that must sell and no one wants to buy that's when we just saw all, you know, essentially chaos kind of emerge on April the 20th. The price went from, let's not forget from like zero or just above zero to as low as minus forty in little over 20 minutes. IT's just incredibly fast to happen. The problem is it can happen in a financial market like that for the physical market, though, for those folks who trade crude out in West Texas, or up in the back and play they're left, scratching their heads going, hang on. I produce physical crude oil. I sell it to somebody down in, I dunno, Louisiana or Texas. The price of this oil is never negative. What's going on this price. Have you been using for years, which has sort of work because my barometer of the price is frankly broken at this point? So, you've got to disconnect mean financial trading and physical trading when they're sort of co-habiting this same world. It looks like very strange results. 

Nathan Hunt: So why are futures contracts important to a function in the crude market? What do they make possible?

Richard Swann: It's giving you a glimpse of the future, right? By definition, it's hugely important. Oil is an incredibly volatile commodity. The price of oil does not, it's not, hasn't even got an underlying upside bias in the way that sort of like equities probably have it is inherently risky. And yet, you're sinking huge amounts of capital investment to projects. They're going to pay out over the next 25, 30 years. You need to have a view of the future price. In many cases, you want to be able to lock in future pricing. So, it's the core purpose of hedging. In that sense, it's a bit like any agricultural commodity. You want certainty over the future price of your production before you start reducing it. And it's very hard to get. So there's a need for it. What we've seen expand massively in recent years, specifically in the last decade as being the growth of oil as a purely financial investment class, alongside that traditional risk management from the oil industry itself. Oil is just another place you can invest in. So you've got a huge interest in sort of speculative futures trading going on alongside the more traditional risk management stuff from the industry.

Nathan Hunt: Let's return to Cushing as a benchmark. Dave, you had referenced this a bit earlier, but can you tell me what changed in the US crude market that started to undermine Cushing?

Dave Ernsberger: In a way, it's a pretty straightforward story that played out over many years. Through the seventies, in the eighties and the nineties, US oil production fell, and the US became a massive importer of crude oil and the US imported crude oil from all over the world. The North sea, sometimes South America, of course, the Middle East. And the fact that the US acted as a sort of force sucking in all of the world's oil for all those years. The US was by a large measure, the world's biggest consumer, by the way. And then it pulled all that oil into port and all that oil moved up in through pipelines Cushing, and it was stored there and it was priced and distributed. That worked well, But the shale revolution, which we don't talk about so much anymore because it's all done and it happened. When US production surged to 13 million barrels a day it more than doubled over about five or six years. Everything reversed. Right? The pipelines that used to take the crude up into Cushing and took, you know, crude all over the place, reverse direction. So they start to push the oil out of the country. And what that meant was that the marginal price of crude oil was no longer evaluate achieved in the center of the United States, where it was being sucked in, the marginal value of the oil was on the water, where it was being pushed out to global markets. So it was the surgeon's production. Then the lifting of export restraints by the Obama administration, which meant that the entire economy of crude oil in the US reversed from being inward-looking to outward-looking. And the bottom line is that Cushing WTI is an inward-looking benchmark, which failed the market on April 20th. And I would argue for the last five years, because the locus of pricing, the marginal value is not an Oklahoma. It's on the water in the Gulf coast. And that's really what we're talking about here and actually, we talk about April and the disconnect that happened there was being like a magnifying glass, which put a magnifying effect on all of these inefficiencies and was a wake-up call to everybody, you know, the American Gulf coast crude assessment that we've launched. ACS American Gulf coast select is in response to an outcry, an outpouring of requests from the industry in the United States for pricing to be done with a margin of value is set. And that's the benchmark challenge if you like, and the benchmark opportunity of the US oil industry having been turned on its head is to discover that value on the water.

Richard Swann: Yeah, it's been a journey as Dave says, that's been coming for several years. You can see this trend that the focus of trade is the Gulf coast. It's really interesting to think about the negative pricing event on April the 20th though, is the catalyst that's sharp in people's minds to this and made the debate much more urgent. I think it's fair to say industries don't like having to, it's quite disruptive to sort of change the underlying basis of trade. Right? Industries are not going to do this every year or two typical patterns will emerge and people get used to trading a certain way. Price references, generally when they're working well and left alone. To be contemplating this kind of change. As Dave said, for plants to be hearing this kind of demand for change is a rare event.

Nathan Hunt: Dave, you had referenced that there have been issues with using Cushing as a benchmark for the last five years. Looking back hindsight being 2020, what were signs of problems with cushioning before April? 

Dave Ernsberger: It's a fascinating journey back through time. I mean, the critical measurement that told everybody that there was a problem here was when NYMEX WTI and Brent futures to take the two futures contracts and compare them side by side, same maturity months, same tenors, the spread between those contracts has been on a random walk for a decade, Nathan, a decade. Sometimes TI's is a little bit higher, more often than not. It's a heck of a lot lower. And I tell you something, there've been a lot of bankruptcies along the way of companies that have lost their shirts. If not bankruptcies, major trading losses, because people just could not call the spread between TI futures and Brent futures. So there was a giant discount for TI before the Obama administration lifted export restrictions. TI briefly rally back up to be around parody with Brent and then it quickly fell away again. So it's like an irregular heartbeat and commodity markets are all about arbitrage flows, optimization. They're supposed to reflect physical markets where the last barrel of oil meets the last buyer that needs it. And everything gets balanced. The irregular heartbeat that has been NYMEX WTI, in Cushing in  Oklahoma, the irregular heartbeat that generated for the United States of America created huge issues for balancing a global oil market. So science had been there for a long time. The call for a different benchmark has been strong outside the US but it's only when this mortal threat became apparent to us production itself, that we saw the call for change within the United States. But, a decade of an irregular heartbeat is a concern. Yeah. 

Richard Swann: About that regular spread Daves talking about there. The headline levels, that's the Cushing futures contract, right? We've already talked about how does that you're in a refinery on the Gulf Coast and here in Texas, where I am that refinery, essentially the crude you're buying for your refinery from the domestic market is going to use Cushing as a reference, let's say, but in reality, you're taking imported crude as well. You're taking probably some middle Eastern crude, maybe some South American crude is coming up. The crude you buy has to compete with all of the international marketplaces. Alright. So if WTI brand spread has gone walkabout it, as Dave says, is experiencing big fluctuations the domestic group you were buying is having to mirror those fluctuate cause it's still referencing Cushing. So if Cushing loses ground to brand $5 in a day, essentially the price you pay relative to Cushing, it's just gonna go up to $5. Well, the industry for years has been working around the imperfections of Cushing is what I'm saying. So there've been flexing around it, aware that it doesn't work. We have to have a price that is the global price, but we just manage it. We'll adjust our differential pricing to cope with the whereabouts of Cushing and more or less than that affection people have put up with. And they were coping with it. On April the 20th. Of course, it changed so fast and so quickly, no one could make those adjustments.

Dave Ernsberger: Yeah. I mean, I'll put it this way, Nathan. When people talk about the price of crude, they usually talk about crudes about $60 or $40 or $55, whatever the heck it is. But they're usually, are we talking about Brent, unless you're watching a US newscast, in which case we're talking about WTI, but here's the nub of the issue for 10 years now people have said, yeah, crude's about 60, except for WTI, which is like 55. So there's always this kind of subheading where there's a value of oil in the world. And then there's this little specialist side for the value in the US and I think people have just got tired of that. It's inefficient. And why should us economics not function efficiently around oil? It, I think it boggles the mind that it went on for as long as it did.

Nathan Hunt: Back to April there are traders in the market who are unprepared to take physical delivery of oil, but have taken positions in the futures market that require them to do so. Can you help me understand how the logistics of Cushing, both as a physical location and as a benchmark helped to create the conditions for negative prices?

Dave Ernsberger: We got phone calls from people on April 20th. I got phone calls from people who I didn't even know who said to me, "Can you just explain to me how the settlement mechanism works for respiring?" I was like, Don't you have a position. So we shouldn't underestimate that people cells got themselves into this problem, right? The mechanisms have been well-defined, but let's talk about the way that it works. Now, one of the most surprising things that are coming out in the laundry for me in the last couple of months is that in fact, Cushing was not full-on April 20th. When you look back on it, I think it was 78, 79% full it's, something around that neighborhood. So technically there was space at the end, however, the tanks not being full is not the only issue. If you're going to take delivery of the oil on the expire, if you're one of these financial players who was holding a contract and we're just going to have to take delivery the oil, not only does there have to be space in the terminal, you have to own a right to use the space at the terminal. You have to lease the space. You have to have a room in the hotel. So even if it wasn't full, which it turns out it wasn't full. If you don't have title to some of the space in the tank somewhere, you can't technically take the delivery. So how did that create a condition of negative pricing? Is that for all intents and purposes, the people who were holding the contract on expiring, a lot of them couldn't take the oil? So what did they do, Nathan? They offered it, they gotta sell it back. They offered it at two bucks. They often did a $1.50. They offered it at minus 50 cents. And then if you look at the screen, they offered it to minus four, minus seven, minus 10, minus 20. Now the surprising thing is why didn't anybody buy it? And that's the question. I think that still needs to be answered by the way, because for sure somebody had titled a tax basic Cushing and for sure some of it was empty. So the question that hasn't been answered to my satisfaction at least is, why didn't anybody buy it when they were offering it at negative 10 or 20 or whatever? But at any rate, if you have something that you can take delivery of, you'll pay people almost anything to take it off your hands. That's basically what happened. 

Richard Swann: Storage is fundamental here. And I think understanding this because it's a physical commodity, you've got to put it somewhere. You can't turn up the truck and take it out of Cushing either. It has to be delivered into one of these storage tanks if you hold the futures contract after expiring. If the folks who do own the storage space are not interested in trading futures or buying it well. There's a disconnect, right? So you've got people who need that storage space and people who've got it but aren't watching the market are interested in selling it. And part of the reason is storage is, um, it's a logistics business. It doesn't typically treat itself as a short term commodity. If there had been a place, you could go, Hey, can I rent a tank for a month on April the 20th? And there was a free open market to rent the storage tanks. I think it's very unlikely. You'd have seen like minus $40. Cause as soon as you get into negative pricing, what are you saying here? If you're offering your crude at minus five, you're telling me I will give you crude oil, which has some inherent value as you know the molecules in there, right? You can make gasoline, you can make jet fuel from it. I'll give you the, and they'll give you $5 a barrel for every pound you take. This is a great deal. And yet no one was taking that deal. No one took it until it goes down in some cases, the minus 40 in the minus thirties as well. So you had disconnect folks couldn't get the storage tanks.

Nathan Hunt: My understanding of at least oil markets is that the exchange typically does make an effort to confirm that people are aware that they must take physical delivery and confirm that people are prepared to take physical delivery of oil. Was there a breakdown on the exchange level here?

Dave Ernsberger: I mean, the only thing I could think of Nathan, and this will all come out in The Washington one day, I'm sure someone's going to write a book about it. Who knew what was going on? The people that own the tank space weren't participating in the futures contract, the people that were participating in the futures contract didn't own the tank space. So it's like, wow, what a spectacular own goal. That was, it was kind of amazing. That's the only thing I can assume happened here.

Richard Swann: One query came in and said, So what happens if I refuse to take delivery? And at first, there's not a question she'll be asking us as Platts, right? This is a question that you ask the exchange and the rules around the exchange, but literally, I focused genuinely contemplating. I'm just gonna refuse to take it participating in one of the world's biggest, biggest financial markets here and saying, I'm not gonna play by the rules. 

Dave Ernsberger: And here we get into the space of conjecture. And of course, Nathan, we don't know, but everything that you say normally and exchange and ensures that participants are credible that they're, they're aware of the obligations. Yes, of course. And I'm sure CME and CFTC, they're going to say that they've done all those things. So what is the breakdown has to be the question. Again, we talked to him about this and I talked about this. Simply have the view. That there were so many financial participants in this contract that at some point along the way, as you got to the 200th participant, the 220th participant, the 400th or however many, there are, that question didn't manifest. And certainly, the people who were signing documents saying they got it. Weren't reading the fine print very carefully. So, you have to wonder how that could have broken down. Of course, the people involved in the exchange and regulatory community take this as seriously as anybody does, which is why it's such a shock. You know, here's the thing though Nathan, with all of this, it's so important. What we're talking about here are technical things. We're talking about logistical things. None of this is about the value of the oil itself. And that's the huge waking nightmare that is Cushing WTI pricing today. And when I talk to people about are people prepare to roll the dice and say, this will never happen again. Believe me, there are people out there who are going to roll the dice and say, this will never happen again. It was a one-off, but the same conditions are in place that led to that craziness. As far as I can tell, that means, of course, it'll happen again. It's only a question of when.

Richard Swann: Here's very technical, so apologies for this in advanced Nathan. But the financial investors in this contract course, they're not getting a call from the exchange saying, are you ready to take physical delivery? Because they don't take physical delivery. They're never going to trade physical oil. Well, what they actually in reality do is they roll their interest forward. So this contract is a lump. The futures contract is about to expire. If they want to still carry exposure to the price of oil, they'll shift their exposure to future months either the next month or even further out, down the forward curve. And it's the timing of that shift. That's important. But what was clear here is people are shifting their interest very late in the month and the rest of the market can see that. Of course, when you shift, if the market structure is what we call contango, the contract that went negative was the main delivery contract. If the June price is higher than May, which can happen quite regularly in commodity markets. What that means is if you've got a million dollars worth of investment in May, and that translates to a certain number of barrels. When you translate that into June, you're going to have fewer barrels because the price was higher. So essentially you're left holding less well, the value goes down in a way that's, it's a difficult thing to sort of navigating, if you have to roll your interest and you might think I don't like this spread, I want to wait for it to narrow so that I don't lose. It was as much on the role, but it's a dangerous game to play when you're getting close to expiring.

Nathan Hunt: Is this the end for Cushing or we'll open interest on Cushing based contracts keep it going? Could it become a kind of zombie benchmark? Not quite alive, but impossible to kill.

Dave Ernsberger: There's a lot of inertia in market behavior and inertia alone will keep Cushing WTI rolling for a while. Having said that, inertia alone won't necessarily guarantee that it carries on for too long, but there is a lot of momentum and folks who were kind of stuck in this, this kind of mindset, you know, often say to people, we spend all of our time talking about this stuff in our business, whether it's plots or any of the part of S&P global, this is what we do all day. Every day. We talk about people all day, but the people who are using the instruments, the people who are using futures contracts, it's like. It's like a fifth of their day. It's like a 10th of their day. You know, they've got other things to worry about. So inertia will keep this going for a while. And you know, the idea of a zombie contract is pretty interesting. I've seen discredited benchmarks limp along for a decade before they finally give up the ghost. And so there's inertia to be dealt with here, but the push for change is pretty powerful. And I'll say this about the US markets in general, whether it's oil or anything else. There's more appetite to pivot. There's more appetite to try new things. There's more appetite for change in the US than almost any other market, anywhere in the world. So even the mighty Cushing futures contract could see people turn their backs on it. If a better solution comes to the fore. 

Richard Swann: Yeah, I think maybe we're thinking about how Cushing through the decades has been a result of a have a happy convergence of interests from the physical crude market. So the folks who expiration production sector producing crude oil refinery using crude oil, the traders in the middle, they've been happy to use the cushion as the physical pricing basis. And it's attracted huge amounts of financial community and trust, right? So you've got loads of open interest and volume on the futures market from non-oil industry folk, but they've all happily wanted to trade at the same place. What we're seeing is not the financial shift at this point. I think that those that would follow that will give you a lot of inertia. The interest we're seeing and moving away and having a Gulf coast price reference is the physical market. Of course, if a futures market diverse from the physical reality that usually spells trouble.

Nathan Hunt: So let's talk about this new benchmark that your team is introducing the plats American Gulf coast, select crude oil benchmark. What's the deal. What's the difference. We call this Brent for the US it's a waterborne crude oil benchmark, which is free of all the shenanigans of terminals and pipelines and all this stuff we just talked about and the deal there, Nathan is AGSM reflects the value of a cargo of crude oil loading out of any number of ports in the US Gulf Coast. And it's the value of, of crude on those boats. Ready to go. Now, why is that important? The crude that gets to the Gulf coast and the crude that loads the export it is cleared the producer margin. It is cleared of the refinery value. It is cleared to the Gulf coast and it is cleared to move to the rest of the world markets. It is the balancing point for the value of US crude before it goes to a buyer elsewhere in the world. And so very much like Brent, it's the value of cargoes that are ready for export, ready to move to refinery demand anywhere in the world and that makes it a global value, including the US value, by the way, it's not just the rest of the world. It's the value of US crude oil in the world. And that's the important point about it being on the water. The other thing that I pointed out about it is the value of crude oil that loads 15 to 45 days forward in time, just like Brent. So every single day, when you wake up and look at the market, AGS is 15 to 45 days forward. One of the contributing factors. We just talked about that led to the meltdown and Cushing WTI was that thing. We called expiry. That thing we call the end of the month, "oh, my God, I got a contract that got to take delivery." That will never happen in a cruise cargo market because it is always trading in the future. It is always further forward. You are never in a distressed scenario. So it's the value of this crew loaded on a boat, ready to go, which means it cleared all the US marginal values. And it's ready for export. 

Richard Swann: The only other thing I'd add to that, Nathan would be, think about logistics. The US is a huge country. It's got lots of crude oil and lots of demand for crude oil. Most of the mini submarkets that spring up domestically involve logistics. They involve a particular storage tank location or a particular pipeline, and you can get markets on those pipelines and in those terminals, and then those storage tanks and they exist and people will buy and sell. But ultimately you've got a logistical limitation and if it gets full or if there's a problem with the pipeline, you're going to get a pricing dislocation in that place from the rest of the world oil market, it happened too extreme at Cushing, right? On April the 20th, it would happen in other individual locations as well. This is on the water, as Dave says that you're not dependent on anyone's location here. So there's a problem at one of the loading jetties in Corpus Christi and Southern Texas. That's okay. Price can still come out of Houston or out of port Arthur. Other places will supply oil into a waterborne market. You're opening up a much greater array of facilities, and you're sort of freeing yourself from the limitations of infrastructure. 

Dave Ernsberger: If you think about what a good benchmark does, Nathan, I think in any market, again, financial commodity, any market you like. A good benchmark represents the value of something open to the greatest number of buyers and the greatest number of sellers. What was the problem with Cushing crude oil? Well, they ran out of buyers. You know, we just talked about that. Once crude has got to the Gulf coast, it has made it to the maximum number of buyers, both inside the US and in the rest of the world. So the maximum number of suppliers who can provide liquidity on the sell-side and the maximum number of buyers can provide liquidity on the buy-side. And that rematches it reunites the US crude price with the reality that the US is a crude export. 

Nathan Hunt: To that point. One of the lessons of April is that the US oil market doesn't happen in a vacuum. How does this new benchmark help you as producers, refiners, and buyers integrate into the global market?

Richard Swann: Well, this price is just inherently linked to the global market. It's in the water. At that point, you can work out a margin to supply that barrel by tanker, over to over to Asia, over to Europe. It is that easy at that point, that price is then in the global marketplace, you won't get this disconnect and not just April 20th. When we talked earlier about how for years, the pricing on the Gulf coast with your imagining Houston refinery that you were having to flex around Cushing because actually, you are pricing global prices into your crude purchasing slate every day. This is the price reference. You won't have to make those adjustments. It will already reflect global realities. 

Nathan Hunt: If I use the Platts American Gulf coast select Crude oil benchmark. And if the market uses it generally, does that mean that oil prices will not go down again?

Dave Ernsberger: That's a question we get asked a lot and I'll tell you what it does. Mean prices did not go negative on us Gulf coast on April 20th, all of our assessments were in positive territory. They were between around about five or $6 up to about seven or $8 a barrel. So, what it means is that if the value of crude in the golf doesn't go negative. That benchmark will not go negative. Now I want to try and give you two clever answers. Let me speak to the actual question you asked. Of course, any price can go negative, but the value of crude oil on us Gulf coast will not go negative unless the value of crude oil and the entire world goes negative. And that's the principle benefit of this design is that it's connected to those global prices. The disaster that was April 20th was that frankly, Crude Oil didn't go negative anywhere in the world. They think in the end, it didn't go close to being negative anywhere in the world, but it went negative in Cushing. And that will not happen again with this benchmark. Now, of course, the entire world curdle market could completely collapse. And if that happens, At least people who use that benchmark will have the solace of knowing every other market went negative too, but they won't be left holding the hot potato. As you said at the beginning of the podcast today, where they've got a negative price, what everybody else in the world has got a positive one. That's what this avoids.

Nathan Hunt: There's an old saying, locking the barn door after the horse is gone. The shale industry in the US has all but collapsed. Chesapeake Energy has filed for chapter 11. Under these circumstances is a new us crude benchmark even necessary. Or are you trying to fix a problem that circumstances have rendered irrelevant?

Dave Ernsberger: Oh, well, there's another old saying I like even better, which is fool me once shame on you, fool me twice, shame on me. All the people that are left standing in the US market. And there are plenty of those people should not make that same mistake again and put themselves in harm's way. That's my view on that. And frankly, there's an opportunity for consolidation. There's an opportunity for asset redistribution, but US oil production will come roaring back the minute, the global world market recovers. And that will be reflected in a Gulf coast benchmark as well, by the way. So for the opportunity for us production to recover for the companies survived these debacles to come back stronger. They need to use this moment to switch their exposure. That's the bottom line on that? 

Richard Swann: Excited. The fundamentals here, the US is still the world's biggest oil market, it just is. So, it's more important than price referencing is market reflective and works efficiently here in the US as it is anywhere. It's the world's biggest oil consumer still and production. Sure, the production outlook this year because of the price crash is nowhere near what we thought it might be. But it's still as Dave says, at the right price, then the oil is going to come back.

Nathan Hunt: Thank you for listening to the Essential Podcasts from S&P global. For more insight on oil markets from Richard, Dave, and their teams, please visit SPglobal.com/Platts.

Thank you for listening to the Essential Podcasts from S&P global. For more insight on oil markets from Richard, Dave, and their teams, please visit SPglobal.com/Platts.

The Essential Podcast is edited and produced by Molly Mintz.