The Crude Report: WTI makes waves

Автор Argus

On February 11, 2022, the total US drilling rig count was reported to reach 635, the most since April 2020. This increase was led by the prolific Permian basin, where output is expected to hit a record this month.

In this episode of The Crude Report, our senior vice president Matthew Oatway and vice president James Gooder discuss the rising importance of the US Gulf coast as a focal point for light sweet crude pricing across the world, and how it is developing into the world’s marginal barrel. 

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James: Hello, everybody, and welcome to The Crude Report. This is a regular podcast from Argus Media covering the world of crude oil and crude oil markets. 

My name is James Gooder, I'm a VP for crude in Europe and Africa, and I'm very pleased to have with me today Senior Vice President for the Americas, Matthew Oatway. Hi, Matt. 

Matt: Hey, James, thanks for having me today. 

James: It's a pleasure. I'm glad you're with us because I wanted to talk about the way benchmarking is playing out both sides of the Atlantic, in the lead up to what is always a crunch point in these discussions, which is what used to be called IP Week, International Petroleum Week, that's next week in London. It's now called International Energy Week – moving with the times. 


But we're gonna be addressing a lot of this in our forum, I'll give you some details of that later. But first of all, Matt, there's been a lot of talk in the market, especially over the past year about the rising importance of the US Gulf coast as a kind of inflection point or a pricing point for light sweet crude that can be referred to more broadly across the world. So maybe you can give us a quick kind of summary of what's been going on there and how things look from the Houston perspective. 

Matt: Yeah, indeed, just a few years after the US export ban was lifted, the US crude producers have taken a really important role in the global markets. The US is now the largest oil producer in the world – it's one of its largest exporters. And it boasts a really fantastic transparent, vibrant spot market at the Gulf coast that has consistently high liquidity, very clear quality specifications, broad diversity of participation, and a very large and vibrant financial market that makes these numbers quite hedgeable. And I think it's worth us all remembering that while Covid changed so much in the world, US crude exports, which were once to the topic of quite a lot of uncertainty, were really remarkably stable. 

And with Permian production now set to grow, we now could potentially see much larger or increasing US crude exports, so what that really translates into is just a renewed focus globally on understanding these markets and participating in these markets. And I think a broader acceptance that the US Gulf coast now represents the marginal barrel in the world, both in terms of pricing and in terms of production and trading volumes. 

James: Yeah, it certainly feels like that. And I think US crude has become a regular part of the diet for refiners here in Europe, and in Asia as well. But still, those buyers in this part of the world are kind of figuring out how the pricing of this crude works. They're being made offers, let's say on a Dated Brent basis in Europe, or in an Ice Brent basis into Asia, or even sometimes against Dubai, and they're trying to understand how that price is built up. Is there any kind of anything that we're doing to bring some more transparency at the very beginning point of that journey? 

Matt: Yeah, of course, I think in the early days of US crude exports, understanding Gulf coast infrastructure was a daunting to people who didn't participate directly in that Gulf coast market – be it at Houston or at Midland. Really, a lot of that's changed. There's been a ton of infrastructure built out, and a much more transparent, more easily understood market. So what we at Argus are doing is we're providing a number of different indexes. You know, WTI Midland, which is the gathering area nearest to Permian production, WTI Houston, which is at the really refining and export center of Houston, where you get a great amount of optionality and an FOB quote, that incorporates cargoes in the US Gulf coast that are exported, not to mention a number of delivered quotes that are combining these indexes with freight rates to price the cargo at it's ultimate destination. 

James: Yeah, that's a lot of transparency all the way down the chain there. And tell me a little bit about the Argus Crude Market Ticker, because this is something I think that some of the financial operators and also some of the refiners buyers here in Europe and Asia might be interested in as a kind of window into that market. 

Matt: Yeah, of course. As US crude becomes a bigger part of the diet for international refiners, as there becomes more financial interest in participating in these markets, there's been a call for increased transparency. So we've been very pleased to work with the industry to provide now our lead marks on bid and offer levels in the market. And this is just one additional way for folks not sitting in Houston, not participating in that daily spot market to understand the development of these markets throughout the day. And we're quite excited about it. And we've heard some some very promising feedback. 

James: That's very exciting and, as I understand, that will be available to anyone that subscribes to our Argus Crude report – so yet another reason to do that. You've mentioned it briefly, just tell me a little bit about the cargo market, because it is something we get asked about over here. Obviously, you mentioned we have an FOB quote over there, but I know there are different loading points. What's the situation in the cargo market? 

Matt: Yeah, of course, we do produce an FOB quote and get some very promising feedback on that. I think the fact remains that in the US, much of the spot liquidity lives in the pipeline market. This is very close to the coast, so it's a great proxy for what's going on in the water. But it also incorporates that optionality that traders have to store those barrels, sell them into the domestic refining system, or export them. So at this point in the development of the US Gulf coast crude markets, most people are telling us that they prefer to look at the pipeline hubs closest to the water, which is, of course, what's being captured in our WTI Houston and WTI Midland indexes. 

Now, I know that James, you're spending a lot of time looking at this, as there's some expectation that WTI may form part of the Brent basket. Is that still in the cards? 

James: So that's a very good question, Matt. I mean, already, as you know, very well, a lot of the cargoes that come out of the states are priced against Brent futures, at the moment that they hit the water. So there's already that kind of interlink. And of course, Brent and WTI have long been a kind of trans-Atlantic arbitrage indication. It's one of the most important, if not the most important oil spread out there. So we have had this ongoing discussion with the industry and price reporting agencies and the exchanges over several years, but really heightened over the past year of how to maintain the liquidity in the Brent basket, because, of course, of Ice Brent futures’ very liquid contract. It's not quite the volumes of WTI at Cushing, but not far off. 

It's clearly an important global market in itself, but it's not a physically deliverable contract. You can convert your positions through exchange of futures for physicals spread, but ultimately, it's a cash settled contract. So the reason that the Dated Brent element persists is there has to be some kind of physical underlying to the Brent complex, and that physical basis has been dwindling over the years. The production in the North Sea, like all production, is not infinite. Brent itself is down to very few cargoes a month. Forties, which has been the kind of stalwart of that basket, is also in decline, and all the rest is in the hands of very small number of Norwegian producers. Let's put it like that. 

So there is a feeling that we should have more physical barrels, frankly, underpinning this Dated basket. And one suggestion is that delivered cargoes from the United States, WTI Midland-quality specifically be part of that equation. And it's certainly something that could work. We at Argus have been publishing an index along those lines for several years now. But there is also a keen awareness, I think, in the market of the complications of such a thing. You know, the Brent basket has been bolstered over the years, but always with more North Sea crude. This will be the first time that something from 1000s of miles away with a completely different trading calendar, with a different cargo size, different players, all of those things, and no linkage into the Brent futures contract itself, of course, which doesn't allow for conversion into delivered cargoes. It's all fob based. For all those reasons, it's a pretty complicated suggestion, but we'll wait and see. There are some of the main players are very supportive of this concept. So in the coming weeks or perhaps months, we will probably hear more proposals along that line. In fact, we recorded a podcast not too long ago about BP's specific proposals on this. So it's definitely still a hot topic. 

Matt: So fiendishly complicated, really. For the folks who aren't behind this proposal to incorporate delivered WTI cargoes into the Dated Brent index, you know, what are the other options? Are there alternatives out there? 

James: Sure. I mean, the one alternative would be just accept that this benchmark is on its last legs and start casting about for other options. I mean, this wouldn't be the first time – there was a very important APPI indexed Tapis price out in the Far East that endured for several years. But eventually, liquidity was such that the market moved away from it and started using various versions of Brent and other things. And so that's, you know, it's a possibility that as Brent kind of reaches the end of its natural life, people will start looking to other places, as we've discussed, like the US Gulf coast, where you have all of the elements of an excellent benchmark, you have the production, consumption, the refineries are right there. The exports, also imports, it's a real kind of global crossroads for crude and a very vibrant market, as you've described. 

So perhaps long term, that's the way this will play out. Shorter term, for those people that don't like the WTI in Brent, or that feel that it may create some kind of circular logic where WTI sets Brent, which in turn is used for pricing exports of WTI, the whole thing could just become ridiculously self referential. For the people who don't like that, or find it too complex, they are suggesting that perhaps other North Sea crudes might fill the gap. I mean, the Brent basket is in decline, as I've said, but there is other crude available. Most notably the Johan Sverdrup field, which though it's heavy and relatively sour, is right here in the North Sea and it is priced on an FOB basis. It's also very popular in Asia as well as Europe. So it's a truly global crude, just like Forties and like Brent used to be. So in some ways, plugging more North Sea crude into the basket might postpone what we feel is the inevitable that eventually things will move stateside. 

Matt: Yeah. So one way or another, Brent needs more barrels. Where those come from and how that works, it sounds like it really remains to be seen. 

James: Yeah, and there's also the possibility that the market does again, we've I think we've discussed on this podcast, there's a possibility that the market may fragment. Now, we often hear the story that you have to have one benchmark for one region, but if you look at reality, that's not actually the way it works. I mean, US crude exports are sometimes done against Brent, sometimes against WTI Houston, sometimes against Midland. If you look in the Middle East, you have Dubai, you have Oman, you have new insurgents benchmarks like Murban emerging, and some people keen to trade against that. So what we could eventually see in Europe is a whole patchwork of different options. Some people using Brent futures like the Saudis already do, some people using Dated with WTI, and others using perhaps a Dated with Johan Sverdrup. And Argus publishes all of those options, of course. 

Matt: And of course, we're going to be discussing this all in a lot more detail in the next couple of weeks, isn't that right, James? 

James: That's right. Yeah. Well, hopefully, anybody who's listening to this that can make it to London, I realize there were still some restrictions in place for some geographies, but we are going to have a tentative IP Week starts on the 21st, I think, of February. And on the Tuesday of that week, we're going to have our traditional forum. It's gonna be at the Biltmore Hotel, and we will put the link to register in the notes of this podcast. So anybody that's keen to come along, do click there and register. We're gonna have an in-person event, but we'll also be streaming it online, just as we did last year, so that people around the world that can't make it to Mayfair can be there in spirit. So hope to see a lot of you there. 

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