Delivering Oil Price Transparency When It’s Most Needed

Trading and Risk

U.S. oil markets are rounding off one of the most volatile and dramatic decades in recent memory. Just since the end of 2014, we’ve experienced two major price downturns as well as a massive shift in global crude trade flows. The U.S. yielded so much oil output that it became the biggest producer globally and began allowing worldwide crude exports for the first time in 40 years.

So much has changed in U.S. oil markets, particularly in the Gulf Coast region, that the old pricing mechanisms that dominated contracts around the globe have lost relevance and liquidity.

The small town of Cushing, Oklahoma, has been the heart of the pricing mechanism, West Texas Intermediate (WTI) crude, for decades. But commodity markets are incredibly physical things.

The problem with using WTI at Cushing today is that the price of oil in Cushing doesn’t accurately reflect the broader fundamentals, and it’s simply not working as a benchmark at that point. So, if you were on the Gulf Coast and you’re using Cushing as a price reference, in reality, the value of your commodity in Texas is going up and down with OPEC. It is going up and down with the coronavirus, hitting jet fuel demand, and all the other oil products. Meanwhile, your contracts are tied back to Oklahoma.

We all remember the chaos of April 20, 2020. The physical delivery component of trading WTI is not to be underestimated. It’s what triggered negative pricing after financial investors. People who never touch a drop of real oil in their lives, and never will, were forced to sell their contracts for WTI back on the exchange with expiry fast approaching and with storage tanks full in Cushing.

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U.S. oil markets reverse and WTI Cushing relevance fades with export growth

A negative-priced WTI futures contract was a wake-up call demonstrating the need for an alternative pricing structure like Platts Americas GulfCoast Select (AGS) and served as the catalyst that’s sharp in people’s minds to make this debate much more urgent. The launch of Platts AGS is in response to an outpouring of requests for pricing to be down where the value is — on the water.

Try Platts crude data free of charge, including the new AGS benchmark

This is a change that’s been coming for several years. You can see this trend, that the focus of trade is the Gulf Coast. I think it is fair to say it’s quite disruptive to change the underlying basis of trade. Industries are not going to do this every year or two — typical patterns will emerge and people get used to trading a certain way.

Looking to an uncertain future, S&P Global Platts and Enverus are still excited about what’s in store for U.S. oil markets. When you look at the fundamentals, the U.S. remains the world’s biggest oil market. It’s urgently important that the price benchmarks we use are market reflective and work efficiently here in the U.S. It’s the world’s biggest oil consumer, and the world’s biggest producer. Sure, the production outlook this year because of the price crash is nowhere near what we thought it might be. However, at the right price, oil is going to come back.

For a limited time in August, access to Platts AGS, along with five other global oil market datasets, are available on a complimentary basis over the MarketView platform. We’re excited to give you the chance to analyze our crude data with this powerful and lightweight market data analytics software. Sign up today.

This article was written by Richard Swann, editorial director of Americas Oil Markets at S&P Global Platts, a trusted MarketView data partner.



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