| NEW YORK
NEW YORK May 6 The CME Group intends to
launch at least two new U.S. crude oil futures contracts before
the end of this year, as the rapid growth in U.S. oil production
and infrastructure boosts liquidity in Gulf Coast spot markets.
The contracts, likely to include one light sweet crude near
the Houston hub and a reboot of its Louisiana sour contract,
would complement rather than compete with its existing West
Texas Intermediate (WTI) futures that is based on delivery into
Cushing, Oklahoma, Dan Brusstar, Senior Director of Energy
Research & Product Development at CME, told Reuters in an
interview late last week.
CME, whose flagship New York Mercantile Exchange (NYMEX)
crude contract has lost ground to
IntercontinentalExchange's European Brent futures
, first mooted the idea of new Gulf Coast-based contracts
in late 2011.
Brusstar's comments are the first to suggest the CME is
nearly ready to move ahead, although not necessarily with a sole
focus on the new Enterprise Crude Houston Oil (ECHO) storage
terminal as it first proposed.
If the new contracts overcome the industry inertia that
often dogs new futures products, they could herald the biggest
change in oil derivatives trading in decades.
"The entire Gulf is developing into a much more robust
trading area," he said. He cited the Houston hub, the area
around the Louisiana Offshore Oil Port (LOOP) as well as St.
James, Louisiana, an area just up the Mississippi from New
Orleans that is an increasingly popular rail and pipeline hub.
"Being optimistic, we're looking to launch something by the
end of the year. The market is going to be there."
The contracts would likely be based on physical delivery, as
is WTI, he said. Although the CME has not finalized any contract
specification, the heavy sour crude contract could be based on
West Canada Select (WCS) and may involve revamping its existing
Gulf Mars crude contract, which has been mostly moribund for
A surge in domestic and Canadian oil production has
increasingly converged on the Gulf Coast, a region that until a
few years ago was largely dependent on imported crude. Now,
shale oil from the Eagle Ford and Permian Basin of Texas,
coupled with new pipelines bringing Canadian shale oil south, is
allowing refiners to push out imports and take more local feed.
For the CME, the key to success will be the expansion in oil
pipeline, terminals, storage tanks and other infrastructure that
would allow users of a physically-backed futures contract the
flexibility to make or take delivery at expiration.
A host of new developments have created a far more varied,
liquid trading environment, including the recent reversal of the
225,000 barrels per day Longhorn pipeline to ship West Texas
crude to Houston and the 400,000 bpd southern leg of the
Keystone XL pipeline, due to start pumping crude from Cushing to
Port Arthur, Texas, before year's end.
Last week, Enterprise Products Partners said it
would expand also its network near Houston, including plans to
more than treble capacity at its ECHO terminal to more than 6
million barrels, plus about 55 miles (90 km) of pipeline to
connect with refineries.
The CME's initial plan a year and a half ago was focused on
a contract delivered at the ECHO terminal, but Brusstar said
that the exchange was now casting a wider net.
"What's happening now is the physical trading is starting to
develop some more liquidity around Houston, but it really hasn't
fully gelled around any one specific terminal yet," he said.
"ECHO is in a great position with their expansion, and some
other terminals in that vicinity that are expanding, we're
continuing to talk to people," he said.
LLS INTO ST.JAMES?
Another option could be a Light Louisiana Sweet (LLS)
contract based into St. James, which is also the destination for
a growing number of trains delivering light sweet crude from
North Dakota's Bakken shale and other new oil patches.
Demand for derivatives to hedge price risk for the expanding
cocktail of domestic crudes that are now being pumped and
refined on the Gulf Coast is helping boost trade in some of the
CME's existing products, most of which are based on financial
settlement against published price assessments.
Trading volume in Louisiana Light Sweet (LLS) futures, one
of many CME contracts that converted from a swap to a futures
last year, has quadrupled to an average of more than 2,000
contracts a day in March versus last year. Open interest has
doubled to around 70,000, CME data show.
Despite the rise in trading activity, the CME faces daunting
odds in garnering sufficient support for a new contract. A host
of previous efforts to launch physically-delivered oil contracts
around the world -- including the CME's Mars futures launched in
2008 with delivery into Loop -- have failed over the years.
Some traders have also questioned whether a new contract
merely risks siphoning liquidity away from NYMEX WTI, a once
global benchmark that has yielded market share to ICE Brent over
the past three years as the growing build-up of domestic
production left the landlocked Cushing contract behind.
Brusstar sees the opposite as more companies follow the lead
of refiners like Valero, which has boasted about
completely weaning itself away from imported light sweet crude
for its Gulf Coast refineries to run domestic grades instead.
"Most of the U.S. grades are going to be pricing as a
differential to WTI anyway, so we see it as a net positive to
both WTI and Cushing," he said. "As more imported grades are
pushed out and displaced -- most of those being Brent-related --
there will be some switch over to WTI pricing."
(Reporting by Jonathan Leff; Editing by Marguerita Choy)