Now a year removed from the April 20, 2020 price collapse of WTI futures into deeply negative territory, the center of gravity for physical crude pricing in the US continues to shift to the Gulf Coast.
Last spring, the crude market was reeling from a near-overnight destruction of refining demand. With US new coronavirus cases rising from virtually zero in mid-March, to over 30,000 per day by mid-April, demand for transport fuels fell precipitously, prompting refiners to cut runs. Producers were slower to act. With refining demand in April 2020 down over 3 million b/d, production had barely budged, falling less than 1 million b/d to 12 million b/d.
The result of this temporary mismatch in supply and demand was a surge in crude inventory, particularly at the physical home of the NYMEX WTI futures contract, Cushing, Oklahoma. The hub's over 75 million b of storage was quickly filling as the May delivery contract approached expiration on April 21, prompting anyone long without committed storage to exit positions. On April 20, 2020, the May contract settled at -$37.63/b, a previously unthinkable move into negative pricing.
The sub-zero futures settlement value sent shockwaves through the industry, with financial implications for any pricing linked to the contract. The event also demonstrated differing market dynamics of the inland pipeline market versus the Gulf Coast. While the assessment for physical crude in Cushing dropped below zero, S&P Global Platts assessed WTI Midland at positive values on the Gulf Coast based on pricing data collected from the market.
Gulf Coast pricing gains in transparency
Platts launched assessments for US crude loading at the Gulf Coast in 2016 and refined the methodology over the years. That work accelerated after the events of April 20, 2020.
With the events of April 20 highlighting the issues around using Cushing, Oklahoma as a benchmark location, the industry called out for crude pricing alternatives that better reflect the realities of US crude supply, demand, and trading. Chaired by Harold Hamm of Continental Resources, the newly formed American GulfCoast Select Best Practices Task Force Association laid out some specific parameters for a new benchmark including that it be based on the Gulf Coast, providing access to the water and limitless storage potential.
Drawing from its experience with the Dated Brent and Dubai-Oman waterborne cargo benchmarks, Platts launched Platts AGS. This Free On Board (FOB) assessment reflects a 700,000-barrel cargo loading WTI Midland crude at terminals across the US Gulf Coast, and Platts has continued working closely with market participants to tackle methodology challenges such as differing cargo sizes and crude quality.
Since the lifting of export restrictions some five years ago, US crude grades have become firmly established in the refining slates of Asian and European refiners and on the back of these regular export flows, transparency has increased notably in US Gulf Coast export pricing. Platts' Houston-based crude pricing team has published over 60 FOB USGC price indications, known as "heards," so far in 2021.
In the Platts Market on Close (MOC) assessment process, WTI Midland Delivered At Place (DAP) Rotterdam sees transparently published bids, offers and trades which are closely analyzed by traders at the US Gulf Coast. Since mid-February, there have been 14 offers published in the Platts MOC process for WTI Midland delivered to Rotterdam, all of which were priced at a differential to Dated Brent.
One of the key factors behind the growth in transparency of US crude export pricing has been the progress in defining WTI Midland quality specifications that are reflected in all Platts assessments around the world.
And while the US crude export market continues to mature, the work on assessment specifications continues, including the recent launch of a consultation on typical terms for terminal and vessel nomination in Gulf Coast crude exports.
Given its close link to Dated Brent, WTI Midland cargo assessments have usually tracked global pricing closely.
Export fundamentals improve as pandemic eases
With crude demand continuing its slow upward trajectory, and amid supply-side discipline, crude prices have stabilized in the $60/b area, which should sustain the US production recovery, spurring more exports. US production breakeven in the lower 48 states ranges from about $34/b in the Permian Delaware to just under $50/b in the SCOOP, according to Platts Analytics.
With Platts Analytics forecasting NYMEX WTI above $55/b through the 2020s, prices are expected to remain at a level that supports increased drilling and production in the US, particularly in the low-cost Permian Basin. Following its February 2021 trough at 10.1 million b/d, US crude production will reach 12 million b/d by the end of 2022, according to Platts Analytics.
That recovery in production should have a knock-on effect on crude flows abroad. Platts Analytics estimates US crude export volumes (excluding Canada) will trough this summer at about 2 million b/d before climbing to 3 million b/d and 4 million b/d by the end of 2022 and 2024, respectively.
Corpus Christi garners greater share of exports
With the temporary decline in US crude exports and startup of pipeline capacity to Corpus Christi, the port has steadily increased its share of US crude exports. In mid-2019, exports from Houston of about 900,000 b/d were about double Corpus Christi, according to Kpler data. As of last month, that relationship had reversed with Corpus Christi export volumes at about 1.4 million b/d, more than double the 600,000 b/d departing from Houston.
Platts AGS reflects the FOB value of a 700,000 barrel cargo loading at any of the commonly used to Texas ports—Houston, Nederland, and Corpus Christi. The assessment's normalization for cargo size and strict parameters around crude quality assure that bids, offers, and trades across these locations are fungible.
WTI Midland in the global market
As the US market observes increasing transparency in WTI Midland price assessments on the Gulf Coast, the global industry is also assessing the inclusion of the grade in the Brent complex. Platts announced in March 2021 that WTI Midland would be included in the CIF Dated Brent assessment beginning July 2022 and that further consultations will be held on the evolution of the core Dated Brent and Cash BFOE benchmarks, including the potential inclusion of WTI Midland.
With the crude's similar gravity and sulfur characteristics to the existing North Sea grades of Brent-Ninian Blend, Forties, Oseberg, Ekofisk and Troll, WTI Midland has become a mainstay of Northwest Europe crude supply. About 700,000 b/d of WTI Midland reached Northwest Europe in 2020.
While the decision of whether to include WTI Midland in the wider Brent complex and the mechanism to do so remain a work in progress, the prevalence of the grade in this market demonstrates the importance of Platts AGS. The assessment provides a critical value along the supply chain from the Permian Basin to global demand centers.