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ICE says to launch Permian WTI futures contract at Houston in Q3 2018

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ICE says to launch Permian WTI futures contract at Houston in Q3 2018

Houston — Intercontinental Exchange's plan to launch a physically delivered WTI crude oil futures contract at Houston is a clear sign the company is taking advantage of a shift in the US crude market toward exports to wrest control of the North American crude benchmark away from competitor CME Group.

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The exchange said Tuesday it expects to launch this quarter ICE Permian WTI Futures, representing the value of physical crude oil delivered to the Magellan East Houston terminal.

The ICE contract would compete against the de facto North American crude oil futures contract, CME Group's NYMEX WTI Light Sweet Crude Oil, which on Monday had nearly 2.5 million lots of open interest.

Though OI on NYMEX crude has risen in recent years, the increase in US crude exports has left many market participants searching for a new, more-relevant benchmark, a fact not lost on ICE in its announcement of the new contract.

"The recent price divergence between Cushing-based WTI and Brent is a reminder that although Cushing is a marker for local crude fundamentals in the midcontinent, it diverges for pricing waterborne US crude," said ICE vice president of oil markets Jeff Barbuto in a statement.

Barbuto was not immediately available for additional comment. CME Group did not immediately respond to a request for comment. S&P Global Platts competes with both companies in providing pricing benchmarks to energy markets.

ICE no doubt is looking to capitalize on some dissatisfaction with NYMEX crude, which critics say is not relevant to the burgeoning US crude oil export because of an inherent locational basis risk.

There are also concerns about how the significant amount of crude oil blending that occurs at Cushing impacts quality, and therefore prices for, WTI, NYMEX-suitable WTI, and Domestic Sweet or DSW.

This has led to the increase in use of the terms "Midland" or "Permian" to differentiate WTI that moves directly to the USGC from WTI that moves to Cushing.

But the ICE Permian WTI Futures contract would not be without its own hurdles. For one, physical WTI MEH currently trades as a differential to the value of WTI at Cushing, Oklahoma.

Market participants will need to perceive ICE Permian WTI Futures as wholly different from NYMEX crude for it to be successful as a competing benchmark.

The Magellan East Houston terminal is seen as somewhat restrictive as a location. The terminal has 8.5 million barrels of crude oil storage with additional capacity expected to come online in September, Magellan spokesman Bruce Heine said Tuesday.

By comparison, there is about 77.5 million barrels of crude storage in total at Cushing.

To be included in NYMEX crude, oil must be delivered into any facility with access to Enbridge and Enterprise Cushing crude terminals. Enbridge has about 20 million barrels of crude oil storage at Cushing and Enterprise has a further 3.5 million barrels, according to the company's websites.

Furthermore, WTI can be exported from a number of other terminals along the US Gulf Coast, including at Corpus Christi, Texas City, on the Houston Ship Channel and in the future in Louisiana as well.

--John-Laurent Tronche, john-laurent.tronche@spglobal.com

--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com