Viewpoint: WTI positioned to become benchmark of choice

Rising production, expanded infrastructure and a growing global appetite for West Texas Intermediate (WTI) have combined to solidify WTI's role as both a primary and a secondary benchmark at locations in the midcontinent and US Gulf coast.

Traditionally, for a crude price to be widely regarded as an effective benchmark it needs to meet requirements that include: ample production now and in the future, high liquidity in the spot market, a high level of participation, and transparency.

For the production requirement, WTI is well positioned. Production from the Permian region in west Texas, where WTI is produced, was close to 4.6mn b/d in October, more than one-third of the US total of almost 12.7mn b/d, according to the latest data from the US Energy Information Administration (EIA).

The strong production profile for WTI means that market participants can rest assured that WTI markets will remain highly active, with plenty of opportunities for spot transactions to be concluded at multiple locations. Other domestic light crude production will continue to be priced against WTI, be it from south Texas or even the midcontinent or Rockies, so it is likely to align the value of that production with actively traded markets and will reflect the prevailing fundamentals of both domestic and global markets.

Making an even stronger case for the use of WTI as a benchmark are the recent start-ups of new pipelines that are facilitating the ability to move WTI crude from the field to market and export centers.

The 670,000 b/d Cactus 2 pipeline and the 400,000 b/d Epic line that move crude to Corpus Christi, Texas, from the Permian basin started service in August. The 900,000 b/d Gray Oak pipeline, which started initial service in late November, uses the same route but will add destinations near Houston when it goes into full service in the first quarter of 2020.

These projects that facilitate exports of WTI to better-align the value of the crude at Midland with other markets, increasing its viability at that location as a secondary benchmark. WTI at Midland is widely used to mark West Texas Sour (WTS) and West Texas Light (WTL) production. This can be seen in the WTI Midland differential to primary benchmark light sweet crude at Cushing, Oklahoma, which has moved from around a $7.70/bl discount in mid-December 2018 — when bottlenecks and oversupply were weighing on value — to around a 95¢/bl premium to the Cushing benchmark in December 2019.

Spot trade volumes reported to Argus for WTI at Midland continue to rise, from some 650,000 b/d in the December 2018 trade month to over 1mn b/d for the December 2019 trade month. Participation in the WTI Midland market in 2019 has been at around 45 unique buyers and sellers, close to numbers seen the previous year.

Spot trade for WTI at Houston tells a similar story. Spot volumes increased from about 312,000 b/d in December 2018 to about 478,000 b/d in December this year while some 34 unique companies participated in that market.

Going into 2020, increasing production and improving infrastructure will further align WTI values in the US and will in turn provide more representative benchmarks at all the locations where WTI is traded. This could lead to increasing usage of WTI as the basis for export pricing of US crudes.

By Gustavo Vasquez

WTI solidifies benchmark status