Viewpoint: AGS Marker grows as potential benchmark

The Argus AGS Marker is poised to emerge as a key benchmark for US crude as Midland-quality WTI liquidity rises at the US Gulf coast, spurred by regional refinery demand as the economy recovers from the strict lockdowns of the early stages of the Covid-19 pandemic.

AGS trade month volume has averaged more than 400,000 b/d since the index was launched 26 June, establishing it as the third-most liquid physical crude assessment in the Americas — behind only WTI Midland and the Argus Sour Crude Index (ASCI).

The new index is the first of its kind, including both waterborne and pipeline transactions across nine locations in a single volume-weighted average normalized to Enterprise Products' Echo terminal in Houston, Texas. The list of locations currently includes terminals in Houston, Corpus Christi and the Beaumont/Nederland area, and may eventually expand to include active terminals in Louisiana.

Volume growth has thus far been capped by difficult-to-work export economics amid a narrow spread between WTI and international benchmark Ice Brent, as well as reduced refinery demand at the US Gulf coast due to poor fuel demand caused by the Covid-19 pandemic and the ensuing recession.

But US Gulf coast refinery utilization has already increased to 80pc ahead of a widely available vaccine for the virus, compared to a low of 63.9pc hit in September. The only other time regional utilization was lower in the last 10 years was during the week Hurricane Harvey made landfall along the Texas and Louisiana coasts in 2017.

Prompt WTI has meanwhile widened its discount to second-month Ice Brent past $3/bl for the first time since September, suggesting US crude is becoming more economically attractive in global markets relative to competing grades priced against the European benchmark.

The spread is poised to widen further as US production returns with demand, and Brent gains support from an earlier distribution schedule of the Covid-19 vaccination, which should boost demand for transportation fuel.

Refinery demand and the improving export economics will likely spur more fob trade activity at the US Gulf coast and more pipeline shipments from the Permian basin to the Texas Gulf coast.

Spot shipments on Magellan's 275,000 b/d Longhorn and 440,000 b/d BridgeTex pipelines to the MEH terminal fell to near zero in the second half of 2020 as the WTI Houston premium to WTI Midland fell to less than a third of pipeline tariff rates, discouraging some speculative trade.

But Magellan has since said it will allow third-party pipelines to deliver into its WTI pool at the MEH terminal and access its Houston Distribution System (HDS), which could boost spot liquidity.

Additionally, the fourth-quarter start to Enterprise's 450,000 b/d Midland-to-Echo 3 pipeline is boosting liquidity at the Echo terminal as flows ramp up. More than 110,000 b/d of WTI at Echo has been reported for inclusion in the AGS Marker so far in the January 2021 trade month, already tripling the record-high of 34,760 b/d set during December trade.

That volume is poised to continue growing, with at least one more shipper expected to begin service on the Midland-to-Echo line in 2021, while Enterprise plans to expand storage capacity at Echo in the first quarter.

By Amanda Hilow