CME Group is considering the start of a crude oil futures contract based in Albany, New York, where a transportation hub is forming as shale oil moves more readily on rail around the US, a top manager for the exchange said Monday.
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The CME is in the early stages of gathering information, Managing Director of Global Energy Gary Morsches said. "With all the transloading and all the rail cars and everything else, that is becoming a pretty good commerce point," he said.
Rail shipments to the Port of Albany have increased to facilitate movements of light sweet North Dakota Bakken Shale crude to East Coast refiners. In recent years, regional refineries have improved refining margins by running the relatively cheap crude while midstream companies and refiners invested in crude-by-rail unloading facilities.
"It's amazing how much of these [railed] barrels are showing up on the East Coast and even up into Canada," Morsches said.
The Northeast has a little more than 1.1 million b/d, or about 6%, of total US refining capacity. Most of the refining capacity in the Northeast is in New Jersey, Pennsylvania and Delaware. From Albany, light, sweet crude also travels to Canada, where Irving Oil operates a 300,000 b/d plant in Saint John, New Brunswick.
But a moratorium has put on hold any new crude projects in Albany County while officials study the health effects of moving crude on rail. New York Governor Andrew Cuomo had Albany County order a ban earlier this month on building facilities until the health implications on emissions of volatile organic compounds and the flammability of Bakken crude were "better understood."
For a potential Albany crude futures contract, CME would need to assess the spot or physical market's liquidity, the potential delivery locations for the contract and also make sure there are diverse buyers and sellers, Morsches said.
CME would also need to decide on the crude quality for the futures contract, he said.
"Rail is big," he said, noting that the railed Bakken crude is bypassing the crude hub of Cushing, Oklahoma, to reach the US West and East coasts.
Cushing is also the delivery point for the NYMEX light sweet crude futures contract, which is owned by the CME.
CHANGING CRUDE FLOWS
"There are changing crude flows here that have changed dynamics, changed pricing and changed relationships," Morsches said. "And I think that will continue as the industry gets smarter at trying to lower their crude costs and using more flexibility in sourcing those barrels."
The changing flows have helped to push out light sweet crude imports from the US, he said, adding that foreign imports into the US Gulf Coast were first backed out by the startup of Enterprise Products Partners-operated Seaway Pipeline, which can transport 400,000 b/d from Cushing to Jones Creek, Texas.
"All that takeaway capacity, all that movement to the Gulf Coast via rail and everything else has lessened the [crude] glut [in Cushing], but I would not say that that glut has moved to the Gulf Coast. ... If you look at those inventories there isn't a glut down there," Morsches said.
Gulf Coast stocks fell 1.34 million barrels to 198.98 million barrels in the week that ended March 28 amid a 419,000 b/d drop in crude imports, which fell to 2.98 million b/d, the most recent US Energy Information Administration data showed April 2.
Gulf Coast stocks have risen from about 166.3 million barrels since January, the EIA showed.
Cushing, on the other hand, has experienced a decline in crude stocks of more than 14.5 million barrels, or 35%, over the past 10 weeks. EIA data showed that Cushing crude stocks were at 27.3 million barrels for the reporting week ended March 28, a nearly 30% deficit to the five-year average (See story, 1925 GMT).
The increase this year of Gulf Coast crude stocks coincides with the startup of TransCanada's 700,000 b/d Gulf Coast Project in late January. That pipeline runs a similar route as Seaway, which is set to be expanded to 850,000 b/d in late May or June. Texas is also flooded with light sweet crude from the nearby Eagle Ford Shale and Permian Basin.
The CME continues to consider the development of a Houston-based crude futures contract as trade activity increases there, Morsches said. But "the jury is still out" as to whether the exchange will move forward with a contract that could be located at Enterprises' ECHO terminal.
"Echo is a very logical infrastructure point," he said of a Houston-based contract. "There's a lot of flexibility and storage. Which is a prerequisite for a good potential contract. ... We are looking at it. We are studying it, and we are talking to customers."