Texas shale challenges North Sea crude as world oil
benchmark
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[February 03, 2018]
By Devika Krishna Kumar
NEW YORK (Reuters) - Surging shale oil
production in Texas and North Dakota is being felt on trading desks in
Chicago, Houston and New York, where a brisk business in West Texas
Intermediate crude futures is far outpacing contracts for London-based
Brent crude.
As the United States approaches a record 10.04 million barrels of daily
production, trading volumes of so-called "WTI" futures exceeded volumes
of Brent crude in 2017 by the largest margin in at least seven years.
A decade ago, falling domestic production and a U.S. ban on exports
meant that WTI served mostly as a proxy for U.S. inventory levels.
"There was a time when the U.S. was disconnected from the global
market," said Greg Sharenow, portfolio manager at PIMCO, who co-manages
more than $15 billion in commodity assets.
Two changes drove the resurgence of the U.S. benchmark. One was the boom
in shale production, which spawned a multitude of small producers that
sought to hedge profits by trading futures contracts. Then two years
ago, the United States ended its 40-year ban on crude exports, making
WTI more useful to global traders and shippers.
(For an interactive graphic detailing the global impacts of the U.S.
shale revolution, see: http://tmsnrt.rs/2EtJgen)
U.S. exports averaged 1.1 million barrels a day through November 2017,
rising to an average 1.6 million bpd in the final three months. That
compares to just 590,000 bpd in 2016.
As U.S. production and exports grow, global firms that increasingly buy
U.S. oil are offsetting their exposure by trading in U.S. financial
markets. That also gives U.S. shale producers more opportunity to lock
in profits on their own production.
RIVAL EXCHANGES, SHIFTING PROFITS
The U.S. boom has reignited a competition over oil trading that began in
the 1980s between two of the world's biggest exchange operators -
Intercontinental Exchange, and the New York Mercantile Exchange, or
NYMEX, which was acquired by Chicago-based CME Group in 2008.
For ICE and CME, energy represents the second-biggest source of revenue,
trailing only stocks and interest rate trading, respectively. ICE is
based in Atlanta, but is known for its European contracts after it
bought London’s International Petroleum Exchange and its Brent futures
contract in 2001.
About 310 million U.S. crude futures contracts - worth about $16
trillion in oil - changed hands on CME's New York Mercantile Exchange
(NYMEX) in 2017, far more than the about 242 million contracts in
Intercontinental Exchange's Brent crude futures.
Energy products including WTI brought in $790 million in revenue for CME
in 2016, the latest annual data available. Brent crude futures and
options alone contributed nearly $300 million to ICE's revenues in 2016.
Since 2011, trading volumes in WTI futures have risen by about 135
million contracts, compared to an increase of about 109 million in
Brent, according to exchange data.
CME has said there is a "clear trend" that the U.S. benchmark is being
used more globally, in part because of growing production there and
relatively stagnant output of the North Sea crude grades that underpin
Brent trading.
That makes investors more likely to trade in WTI than Brent, said Owain
Johnson, managing director of energy research and product development at
CME.
"You know more about what WTI will look like in the next five years," he
said.
Jeffrey Sprecher, chief executive at ICE, dismissed the notion that
WTI's global influence is rising versus Brent, calling it "a red
herring."
[to top of second column] |
Workers hired by U.S. oil and
gas company Apache Corp drill a horizontal well in the Wolfcamp
Shale in west Texas Permian Basin near the town of Mertzon, Texas,
U.S., October 29, 2013. REUTERS/Terry Wade/File Photo
EXPORT SURGE LURES BUYERS
The increasing liquidity in U.S. oil futures stems partly from the surge in
hedging by domestic shale producers but also from growing overseas interest,
which pushed outstanding contracts to new records in 2017.
Average daily volumes in WTI futures from outside the U.S. jumped nearly 40
percent in 2017 over 2016, according to CME Group data. Foreign participation in
WTI now represents about 30 percent of CME's average daily volume.
"The U.S. is reclaiming the title of being arguably the world's most relevant
crude oil benchmark" because of rising U.S. exports and production, said Michael
Tran, director of energy strategy at RBC Capital Markets in New York.
Purchasers worldwide say the U.S. contract may have to change, however, to
reflect the price at export hubs such as Houston. Currently, WTI contracts are
tied to oil deliverable at the landlocked storage hub in Cushing, Oklahoma.
More supply is coming to Gulf Coast ports from Texas, where production is now
near 4 million barrels a day.
"We need a new benchmark for pricing American crude oil for export to Asia and
other areas," said Chen Bo, president of Chinese state oil trader Unipec, at an
industry event in Houston in November.
Unipec is the trading arm of refiner Sinopec and the largest buyer of U.S. oil
in Asia; Chinese firms bought an average of 220,000 barrels a day of U.S. crude
last year.
Sources with two major trading firms said CME has approached them to gauge
demand for a benchmark futures contract that would have Houston as its delivery
point.
In December 2017, the NYMEX introduced a new contract aimed at the growing
market of Asian buyers importing U.S. crude, such as China, the second biggest
importer in 2017. The contract prices the spread between WTI and Middle-East
benchmark Dubai.
The contract allows Asian refiners to better evaluate the economics of U.S.
crude compared to oil elsewhere, Chen said.
The dominance of Europe's Brent and America's WTI crude futures comes despite
Asia's growing share of global oil consumption, up from 27 percent in 2000 to
almost 40 percent today. Europe's and North America's share of demand has
declined.
A key reason for the Middle East's and Asia's failure to create an oil futures
benchmark is that financial commodity trading is not well established in either
region.
Middle Eastern producers are largely state-owned, and while the Dubai Mercantile
Exchange (DME) was set up in 2007 to establish a new benchmark, it has so far
not managed to attract enough liquidity to dominate the region.
In China, a long-delayed futures contract is expected to be launched by
Shanghai’s INE exchange this year, with the stated goal of becoming Asia’s
benchmark. But wrangling over details has undermined INE's credibility, analysts
say.
That's left the United States, with its established commodity markets, operating
as "the Wal-Mart of the oil market," Tran said.
(Reporting by Devika Krishna Kumar in New York; Additional reporting by Bryan
Sims in Houston, and Florence Tan and Henning Gloystein in Singapore; editing by
David Gaffen and Brian Thevenot)
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