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US crude exports drive physical derivatives demand

12 Oct 2017, 1.48 pm GMT

US crude exports drive physical derivatives demand

Geneva, 11 October (Argus) — Surging US crude exports are boosting interest in physically delivered contracts as global participants seek greater price discovery in key US Gulf coast markets, a CME official said.

Open interest in Argus WTI Midland contracts is approaching 300mn bl, while open interest in WTI Houston — which represents the physical value of light sweet Permian field-grade quality crude at the water — is close to 90mn bl. This represents an 80pc and an almost six-fold increase in open interest in the two grades, respectively, since the beginning of 2017.

Combined with open interest in the other two most liquid crude streams in the US Gulf coast — Mars and LLS — total open interest for exchange-listed Argus instruments currently exceeds 500mn bl, exchange data shows. This is up 71pc since January.

"In the US, we are seeing a big upturn in trade on Argus-linked grade derivatives: Argus Midland, Argus Houston, Argus LLS. We are starting to see those grades trade really actively," CME managing director of Energy Research and Product Development Owain Johnson told the Argus European and Global Crude Summit in Geneva. Argus competes with Platts and other price-reporting agencies to provide price assessments and other information on commodity markets.

With its increased pipeline connectivity to domestic crude production regions, Houston is rising in importance as a major US crude spot market hub, supported by its access to refining and export facilities.

The Argus WTI Houston price assessment reflects WTI transactions at Magellan's East Houston crude terminal, which receives WTI from west Texas via the 400,000 b/d BridgeTex and 225,000 b/d Longhorn crude pipelines.

More WTI will have access to the Houston area soon following the start of Enterprise's 450,000 b/d Midland-to-Sealy pipeline. Partial service is planned to start in the fourth quarter, with volumes rising to full capacity next year. Enterprise's Sealy storage facility west of Houston is connected by pipeline to its Echo terminal on the Houston ship channel.

Monthly figures for July and August put US crude exports at well under 1mn b/d. But a US EIA estimate of weekly volumes put average domestic crude exports at 2mn b/d in the week ending 29 September, a record that throws a spotlight on the sharp rise of US shale oil over the past few years.

The trend is helping to drive increased activity of the WTI futures contract as well as drawing new financial participants to the market, at a time of continued concern over the future of the North Sea Dated benchmark. And so far this year there has been 15mn bl of physical delivery trade of WTI through the exchange.

The US is exporting a growing share to the Asia-Pacific region and Johnson highlighted the growing role in liquidity played by the Asian market in WTI trading activity. He said some 18pc of all trading activity on WTI in the third quarter was done in Asian hours, reaching even above this number on a monthly basis during this year.

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