OUTLOOK: Benching the WTI
The coastal region of Texas, Louisiana, Mississippi, and Alabama boast a total refining capacity of 6.3 million barrels per day, which translates into roughly 42 percent of the total refining capacity in the United States. These facilities acquire much of their crude oil from international sources, yet a longstanding U.S.-based reference price for the commodity often ignores the pricing behavior of other key benchmarks. Platts, a major provider of energy and commodities information, has unveiled a reference price that it contends is less erratic and thus better suited for refiners in the Gulf Coast region.
Historically, West Texas Intermediate (WTI) has served as the primary benchmark for pricing crude oil in the U.S. WTI traditionally has been priced at a premium to the Brent Crude benchmark because it is the lighter of the two light crude oils. Furthermore, it should command a higher price than heavier sour grades that are more difficult to refine.
In recent years, however, the WTI has violated these longstanding principles with increasing frequency. In fact, it is not unusual for WTI to sell at a steep discount compared to Brent and even sour crudes. Platts contends the pricing disparities between WTI and other benchmarks stem from logistics difficulties in Cushing, Okla. The self-styled "Pipeline Crossroads of the World," Cushing is home to vast oil storage facilities and serves as the WTI price settlement point on the New York Mercantile Exchange (NYMEX).
According to Platts, WTI no longer serves as a global reference oil price because a difficult logistical situation exists at Cushing. The information provider maintains that infrastructure ownership issues, the lack of clear information regarding oil storage availability, and bottlenecks in pipelines from the Gulf Coast are all factors that have contributed to WTI's demise as a reliable world benchmark.
"At best, WTI seems currently suited to pricing oil in Cushing, Oklahoma," Platts concluded in a written statement. Platts has not been the only entity lamenting the status of the WTI. In 2007, a high-ranking economist with the now-defunct investment bank Lehman Brothers called WTI a "risky and unrepresentative benchmark."
A New Benchmark
In an effort to provide a more representative benchmark than WTI, Platts has unveiled a new crude oil price assessment designed to reflect the most competitively priced crude oil among four U.S. Gulf Coast pipeline sour crudes: Mars, Poseidon, Southern Green Canyon, and Thunder Horse. According to Platts, the new Americas Crude Marker (ACM) applies to more than 800,000 b/d of U.S. production. The chart below illustrates the volume composition of the ACM.
"Market participants have long expressed the need for a benchmark that reflects broad crude oil economics in the U.S. Gulf Coast," said Jorge Montepeque, Platts' global director of market reporting. "In this location, there is a strong confluence of buyers, sellers and refiners of crude oil, the necessary ingredients for reliable price formation.
Platts is publishing ACM assessments for the first three months of trade. ACM assessments published on March 16 reflect crudes traded for April, May, and June. The trading month rollover for ACM will take place on the first business day after the 25th of each calendar month so that it can follow the trading month rollover for the existing sour crude pipeline assessments. On March 26, ACM assessments will reflect trading for May, June, and July.
"The initial response by industry to the ACM has been very favorable," said Dan Tanz, Platts' vice president editorial. "Producers and consumers have been seeking better indicators of crude oil value in the Americas. We are pleased to offer the market what we believe will be a valuable new reference price that captures the breadth of activity in the Americas' crude oil trading center."
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