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ICE to launch futures contract based on Permian crude deliveries to Houston

Intercontinental Exchange (ICE), an operator of global exchanges and clearing houses for US financial and commodity markets, will launch in Q3 2018 a new Permian West Texas Intermediate (WTI) crude oil futures contract with physical delivery in Houston, providing traders with direct access to Houston prices.

With the growth in shale oil production in the Permian Basin in West Texas, which is estimated at 2.8 million bbl/day, and increased US exports alongside growing Asian demand for light sweet crude oil, Houston has become the central delivery point for US crude. The ICE Permian WTI futures contract is designed to provide price discovery, settlement and delivery at Magellan Midstream Partners’ terminal in east Houston.

“The US Gulf Coast, with Houston as its trading hub, is the natural delivery point for a North American crude oil benchmark based on WTI from the Permian Basin,” said Jeff Barbuto, Vice President of Oil Markets at ICE. “We’re excited to work with Magellan to offer a new tool for price discovery and risk management for US crude production and exports. 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 Mid-Continent, it diverges for pricing waterborne US crude. We are working with the market to provide a reliable and predictable quality specification and location that is relevant to global crude pricing and accessible for domestic and foreign buyers alike.”

Commenting on the announcement, John Coleman, Wood Mackenzie’s Senior Analyst North American crude oil markets, said: “A coastal pricing point for US light sweet crude will be much more relevant in coming years as the US crude export story continues to unfold with export markets and coastal pricing becoming more of a focus for US crude producers.”

As tight oil production continues to grow, the US is fast becoming a major player in the global crude market. Wood Mackenzie estimates onshore Lower 48 production to exceed 11 million bbl/day by 2023, positioning the US to become the world’s largest oil producer.

Respectively, US exports are forecast to rise approaching 4.5 million bbl/day by the early 2030s. With more than 60% of total volumes over the next decade, the Permian Basin will constitute the largest percentage of US crude exports.

As US producers and midstream operators assess their portfolios, questions about specific crude streams will arise as they assess which are most attractive to international buyers and which export hub is best positioned to not only reach the right markets, but to handle the highest volumes.

“This new contract will allow producers to hedge production relative to coastal prices which are much more relevant for producers looking to export their crude,” Mr Coleman added. “With export volumes expected to surpass 1.5 million bbl/day by 2025, substantial pipeline interconnectivity with major crude producing regions like the Permian and the Eagle Ford, and direct connections with the current benchmark pricing hub in Cushing, Oklahoma, Houston is a natural point for a coastal pricing hub.”

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