A new daily oil price considered a better indicator of the price of U.S. light sweet crude oil may soon be in play. The pricing assessment is expected to lend better transparency to U.S. crude markets and may one day become the true measure of inland U.S. crude spot pricing.
"The development of over 1.7 million b/d of pipeline capacity to bring U.S. crude production to Houston by 2014 has set the stage for a new spot market and created the need for a new marker that reflects both U.S. Gulf Coast and global crude fundamentals," said Esa Ramasamy, Platts editorial director, strategic oil markets development. "As new pipelines and other forms of transportation enable domestic crude to flow to the Gulf Coast rather than being trapped inland, the U.S. market is rapidly resetting itself. The change is already evident in the narrowing price spread between WTI and Brent, two global benchmarks. The rise in U.S. domestic crude oil production is beginning to be felt globally."
Houston, Texas is the largest refining center in the U.S. with 2.2 million barrels of refining capacity per day. Much of the current Gulf coast refinery capacity is set up for heavier crudes like those traded under the name Brent. Crude summoned from tight formations such as the Eagle Ford and Bakken shales -- light sweet crude -- cannot be refined using the same equipment as the heavier Brent.
"Houston's superior refining capacity, storage, and waterborne loading infrastructure positions it to become a key pricing hub in the Americas," said Suzanne Evans, senior manager, Platts' Price Group. "The prolific Permian Basin – the home of WTI – and the Eagle Ford shale are in Houston's backyard. This new crude oil production, combined with movements of Domestic Light Sweet from the Cushing, Oklahoma, hub to Houston via the Seaway Pipeline, is creating a vibrant light, sweet spot market in Houston."
The fundamentals of American crude movements are changing and if WTI proves to be no more than a stopoff for crude on its way to export, WTI pricing will reflect the Brent price more closely than inland spot pricing of light sweet crudes from shale. In that event, producers and investors will look to a new benchmark that more accurately reflects the changing face of U.S. refining.