By: Paul Takahashi – Houston Chronicle – For nearly four decades, Cushing, Okla. has served as the epicenter of the U.S. oil market.
The tiny town of 7,600 residents an hour’s drive northeast of Oklahoma City is the main storage facility, trading hub, and delivery point for millions of barrels of oil produced in West Texas and later transported to refineries and petrochemical plants across the country. The U.S. crude benchmark — West Texas Intermediate — tracks the price of oil at Cushing.
But since the Obama administration lifted the nation’s 40-year-old ban on oil exports in December 2015, the epicenter of the U.S. oil market is shifting from the storage tanks and pipeline terminals in Cushing to the ports and ship terminals along the Gulf Coast, including the Port of Houston. The U.S., the world’s top oil producer, thanks to the shale boom, exports 3 million barrels of crude daily. Much of this oil comes from West Texas, often bypassing storage facilities in Cushing and going directly onto oil tanker ships in Corpus Christi, Houston, and Beaumont. These ports accounted for 77 percent of all U.S. crude exports in 2019, according to Argus, an oil pricing agency.
“Oil coming out of the Permian is coming here, being refined and going outbound to Asia,” said Bill Diehl, president of the Greater Houston Port Bureau. “All the ports in Texas, including Houston, are benefiting from it.”
In a sign of the growing influence of Gulf Coast ports to global oil markets, two leading oil price agencies Argus and S&P Global Platts this year introduced new crude benchmarks that track the price of West Texas crude on ships departing from the Gulf Coast for international consumption. The new benchmark, American Gulf Coast Select, goes up against the longtime, well-known West Texas Intermediate, which tracks the price of crude in Cushing primarily for domestic consumption
“The center of gravity is shifting away from Cushing, from the Permian to the Gulf Coast and increasingly, international markets and beyond,” said Richard Swann, group manager of oil pricing for Platts, which launched Platts American Gulf Coast Select in August.
“As more infrastructure has developed on the U.S. Gulf Coast to support the export market, this has created the opportunity to look at a global benchmark for the U.S. Gulf Coast,” said Bruce Fulin, vice president of Argus, which launched Argus American Gulf Coast Select in June.
‘The next energy exporter’
A decade ago, a barrel of oil produced in the prolific Permian Basin of West Texas had two key markets: Refineries and petrochemical plants around the country, and storage facilities in Cushing.
Today, that same barrel of Permian oil has access to more markets around the world with the lifting of the U.S. crude export ban five years ago. Pipeline companies have built nine pipelines that can transport more than 5 million barrels per day between West Texas and the Gulf Coast, where crude can be refined or exported to other countries.
“The Permian now has access to 5, 6, 7 markets. You can get to any key U.S. port as well as global ports,” Willie Chiang, CEO of Plains All Americans said in July. “(Pipelines) are enabling highways to move oil and gas so that we can become the next energy exporter.”
The U.S. exported an average of 3.2 million barrels per day in the first half of 2020, up from 2.9 million barrels per day in the first half of 2019 but down from the record high of 3.7 million barrels per day in February, according to the Energy Department. Canada took in most U.S. crude during the first half of 2020, followed by China, The Netherlands, South Korea, and the United Kingdom.
Although Houston ranks No. 2 for crude exports nationally — surpassed only by Corpus Christi — it is considered a key export hub because it has the most extensive network of pipelines and 570 million barrels of crude storage capacity. Houston also has the nation’s largest petrochemical complex, boasting 12 local refineries that can process nearly 4.5 million barrels of crude per day.
“Houston is the center of all the energy growth,” Diehl said. “They’re moving a lot of crude and gasoline through Houston.”
A barrel of West Texas crude that ends up in Houston can be loaded onto oil tanker ships, or refined into liquid petroleum gases such as ethane, propane and butane used to create a variety of petrochemical products.
To handle the rise in crude exports, Port Houston is looking to widen the ship channel by up to 50 percent to accommodate larger oil tanker ships. The $960 million expansion project is pending federal approval.
Gulf Coast Select
Argus and Platts said they created new crude benchmarks — American Gulf Coast Select — to better reflect the price of oil on the Gulf Coast and make trade easier with international buyers.
Previously, oil traders worked around West Texas Intermediate prices. In simple terms, buyers and sellers took the oil price in Cushing, added transportation costs and other fees to determine the price of that oil when it was loaded onto ships bound for international markets.
To determine American Gulf Coast Select crude prices, Argus and Platts survey oil traders and pipeline companies in the Houston area, Corpus Christi, Beaumont and Nederland to get a more accurate reflection of the oil export market.
The new benchmark also allows for easier trading between other global crude benchmarks, such as Brent and Dubai, which also track oil prices at ports in the North Sea and Middle East.
Will American Gulf Coast Select replace West Texas Intermediate, the popular oil benchmark followed by investors around the world? That’s unlikely, Swann with Platts said.
“WTI is a very liquid futures contract that really attracts a huge amount of financial investment,” Swann said. “It’s well-entrenched as a benchmark.”
Fulin with Argus said he too doesn’t think American Gulf Coast Select will replace West Texas Intermediate as the premier U.S. crude benchmark. However, he said he sees a place for American Gulf Coast Select to coexist alongside the more popular West Texas Intermediate benchmark. The former tracks the U.S. export market, while the latter tracks the domestic oil market, useful for Midwest refineries and Wall Street investors betting on the direction of U.S. oil prices.
“American Gulf Coast Select is a particular symbol for Houston and Texas globally around the world,” Fulin said. “As U.S. crude got exported around the world, it’s made a significant global impact.”
