Houston Oil Benchmark Responds to 2020 'Wake-Up Call'

Magellan Midstream Partners, L.P (NYSE: MMP) and Enterprise Products Partners L.P. (NYSE: EPD) on Monday unveiled a new futures contract for the physical delivery of crude oil in the Houston area.

The new Midland WTI American Gulf Coast contract will trade on the Intercontinental Exchange (ICE) platform by early 2022 – subject to regulatory approval – under the symbol “HOU,” MMP and EPD noted in a joint written statement emailed to Rigzone. They noted the contract responds to market interest for a Houston-based index with greater scale, flow assurance, and price transparency.

“Magellan is pleased to join forces with Enterprise and ICE to offer this leading-edge joint futures contract,” remarked MMP Chief Operating Officer Aaron Milford. “The new contract improves the transparency, flexibility, and marketability of Midland WTI crude oil for Gulf Coast and export customers while maintaining industry-recognized quality and consistency.”

According to MMP and EPD, the HOU futures contract’s quality specifications will align with a West Texas Intermediate (WTI) crude oil originating from the Permian Basin with common delivery options at the Magellan East Houston (MEH) terminal or the Enterprise Crude Houston (ECHO) terminal. The companies noted they plan to support HOU by discontinuing their existing delivery services provisions under current futures contracts deliverable at MEH and ECHO once the new contract wins regulatory approval and is finalized.

Harold Hamm, Continental Resources (NYSE: CLR) board chairman and American Gulf Coast Select Best Practices Task Force Association founding member, called April 20, 2020 – when the Cushing, Okla., WTI contract plunged to negative $38 per barrel – “a wake-up call for the oil industry.” He explained the milestone highlighted the need to address the Cushing contract’s storage constraints and landlocked location.

“I started the American Gulf Coast Select Best Practices Task Force to develop specifications for a new U.S. light sweet crude oil price benchmark in the American Gulf Coast, and to advocate for its implementation and adoption as the main pricing point for the U.S. oil markets,” Hamm noted in the MMP and EPD announcement. “We think a futures contract in the most interconnected market center in the country, with a widely accepted quality spec, which settles with guaranteed delivery of crude oil is an important new alternative for the industry. The task force has worked tirelessly to create a marker with transparency and liquidity that is waterborne for this modern era. The Midland WTI American Gulf Coast futures contract established by the alliance between ICE, Magellan, and Enterprise is a huge step forward for the industry and goes a long way to accomplishing the mission on which the task force has been working.”

A.J. “Jim” Teague, co-CEO of Enterprise’s general partner, and Magellan CEO Michael Mears, applauded Hamm’s advocacy for the HOU contract.

“We are excited about this new crude oil futures contract, which features the combined strength of two extensive and complementary networks of midstream assets with a world-class trading platform to provide customers with greater supply, flexibility, and price transparency,” commented Brent Secrest, executive vice president and chief commercial officer of Enterprise’s general partner. “As the market hub for Permian Basin production, Houston represents the most logical choice for a new futures contract. Between Magellan and Enterprise, we offer access to virtually all of the export capacity in the Houston region, redundant connectivity to all area refineries, a robust Gulf Coast storage position, and interconnects to all of the relevant supply pipelines, including those owned by third parties.”

ICE Global Head of Oil Markets Jeff Barbuto stated the Midland WTI American Gulf Coast index will be traded on the same global platform as the ICE Brent, Murban, and Platts Dubai Crude Oil futures contracts.

“Combining efforts with Magellan and Enterprise to establish a benchmark for pricing Midland quality WTI on the Gulf Coast allows ICE to offer the industry a futures contract with over 4 million barrels per day of supply capacity from Midland into Houston, access to both domestic and foreign demand, and nearly 60 million barrels of storage capacity in the Magellan and Enterprise systems,” said Barbuto.

To contact the author, email mveazey@rigzone.com.