ICE, CME Houston contracts reflect different barrels
ICE and CME Group are each touting new physically delivered futures contracts for WTI crude in Houston — designed as benchmarks for US crude exports — but the logistics written into each contract will reflect widely different barrels.
ICE's Permian WTI Houston contract, or HOU, launched 22 October and reflects BridgeTex and Longhorn pipeline WTI deliveries to the Magellan East Houston (MEH) terminal. That's the same location as the financially settled Argus WTI Houston swap, which trades on both exchanges.
CME's WTI Houston crude oil futures contract, listed under the commodity code HCL, will launch on 5 November, reflecting the value of light sweet crude delivered into the Enterprise system at the Echo terminal, Genoa Junction or the Enterprise Hydrocarbon Terminal (EHT) on the Houston Ship Channel.
Nineteen companies are currently trading HOU on the ICE platform, and half of them are brand new to the US market, Jeff Barbuto, vice president of oil markets at ICE, told Argus this week. About 445 contracts sold on the first day of its listing, and there were 347 lots in open interest. Yesterday, 325 contracts sold and there were 727 lots in open interest, according to end-of-day reports.
"The market feedback was clear that MEH was the preferred delivery facility because of Magellan's reputation for quality control, physical liquidity and strategic connectivity,"
Some market participants are concerned about splitting liquidity between Argus WTI Houston and the two new contracts, lending supportto CME's decision to choose an alternative location.
"What we didn't want to do was compete with the existing market," said Owain Johnson, managing director of energy research and product development at CME. The new CME contract should complement both the Argus WTI Houston swap and the Nymex light sweet crude futures contract priced at Cushing, Oklahoma.
Physical trade volumes reported into the Argus WTI Houston volume-weighted average totaled about 280,000 b/d during the November trade month, which ended 25 October. The Argus WTI Houston futures contract has an open interest volume of roughly 60,000 lots on ICE, which lists it under the commodity code ACM, and more than 140,000 lots under CME's HTT listing.
"What we typically find is that the more contracts there are, the more spread opportunities, and the more liquidity increases in all the legs," Johnson told Argus. "We are actually hopeful [the new contract]will enhance liquidity on the grades and enhance liquidity on WTI. We are expecting most of the outrights to still be hedged largely at Cushing."
Spec differences
The quality specifications for the ICE and CME contracts are somewhat different as well. The Magellan East Houston terminal accepts WTI with a gravity content of 36°-44°API and sulfur content up to 0.45pc. ICE's new contract reflects the same quality, although BridgeTex and Longhorn pipelines WTI deliveries to MEH averaged 42.4°API with a 0.1281pc sulfur content in the last six months, according to ICE.
HCL specifies a physically delivered barrel with gravity ranging from 40°-44°API and a sulfur content less than 0.275pc, intending to reflect the quality of deliveries longer term in case typical specifications change in the future as they have at Cushing.
"I think that this barrel having a tighter spec gives it a bit of an advantage," said Brent Secrest, senior vice president of liquid hydrocarbons marketing at Enterprise Products. "The tighter sulfur allows for a less blended barrel."
Enterprise said it would provide segregated breakout storage in its Houston system for physically delivered volume sold into the HCL contract that meets the narrower quality specifications, and that any blending would have to be at a third-party facility upstream.
"The point is that global players want a neat barrel," Secrest said. "They don't want a blended barrel. And they want a consistent quality on that barrel."
Some traders think they could save money on broker fees by purchasing crude by way of either of the exchanges instead buying in the physical spot market, but there are exchange fees upward of $1 for each transaction and delivery to Enterprise's Genoa and EHT sites will be charged an additional 15¢/bl.
Neither of the new contracts offers delivery onto a vessel, so traders will still need to facilitate with Enterprise, Magellan or third parties to arrange dock space for exporting crude. Loading costs typically average around 50¢/bl in the Houston area.
All parties involved with the physically delivered contracts, however, agree that the Houston price of WTI-type grades will need to "price to export," which indicates they will likely track Brent values while remaining at a steep discount.
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