Major changes, and improvements, are underway in how domestic crude for export will be priced. Both major price reporting services, Argus and Platts, have launched new USGC crude price assessments designed to capture, and represent, the large waterborne market for WTI Midland moving to export.
The new assessment, American Gulf Select or AGS, is building on, and ultimately likely to replace, the existing terminal based WTI Houston market at Magellan East Houston (MEH) that has developed over the past four years. AGS will encompass all WTI “on the water”. Barrels teed up for export in Corpus Christi, Houston and Beaumont/Port Arthur (BPA) in addition to a broader list of onshore terminal locations along the Texas Coast, not just MEH.
Ground zero for AGS pricing will be the Enterprise ECHO terminal in Houston, meaning all waterborne WTI trades reported in Corpus or BPA will be adjusted to an ECHO equivalent basis. The ECHO terminal receives large pipeline inflows from both the Permian and Eagle Ford. Likewise, the ECHO terminal is interconnected with two existing Enterprise crude export facilities (HSC and Texas City), numerous 3rd party HSC export terminals, and eventually it could be a key transit location on the path to the Enterprise led Seaport offshore loading export terminal (2022 in service).
The AGS price quote has been in the works for some time. However, the launch of the new price assessment was accelerated following the negative price fiasco for Cushing based CME crude futures April 20th. The appropriateness of inland, pipeline based WTI Cushing, as a global benchmark has been questioned since the CME crude futures contract was initially launched in 1983. The brief plunge to negative $40.00 this spring may have been the straw that broke the camel’s back.
Note that AGS is being quoted as both a fixed price market and as a market differential. Many market participants hope that AGS supplants WTI Cushing as the fixed price basis for the most liquid CME and ICE futures contracts. Given its waterborne basis, the price correlation with Brent should be even better for AGS than WTI MEH. Acceptance in the market is important. Reports suggest that CME is working alongside Argus to create an AGS based exchanged traded futures/swaps contract. In similar fashion the ICE exchange is coordinating with Platts on creating its own AGS based derivatives.
AGS also completes the price transparency pathway between the Permian pipelines and global cargo markets. Fungible, transparent WTI Midland can now be effectively priced in Midland, Corpus Christi, the Upper Texas Coast and Northwest Europe. Both Argus and Platts have redesigned their benchmark Dated Brent contract to encompass sweet crude delivered into NW Europe other than just North Sea grades like Brent. This includes sweet grades from west and north Africa and most importantly, the large volume of WTI Midland already flowing to European refineries.
Bottom line: Within 6-12 months will we see material Permian and Eagle Ford physical volumes trading on an AGS basis. This will provide better transparency, better correlation with Brent and potentially greater hedge efficiency. How quickly AGS futures might supplant Cushing futures as the US benchmark is another matter. There is a great deal of industry support for AGS. That said history has shown that traders will frequently opt for liquidity and transparency over correlation, one of the key reasons a long “flawed” futures contract can remain on top for 30+ years.
John Saucer
Prior to joining Mobius Risk Group as Vice President of Research and Analysis, John spent 13 years at the Houston based energy fund AAA Capital Management Advisors as a Trading Principal and Petroleum Specialist. Previously, he was a Vice President of Commodity Futures Sales at Citigroup. During his 12‐year career at Citigroup, he also spent 7 years as a Vice President of Energy Analysis, responsible for fundamental research in the firm’s Futures Research Department. Prior to his work at Citigroup, John spent 5 years as a senior editor at Petroleum Argus, a leading international oil market publication. John is a graduate of The University of Texas with a BA in Economics.