July 17, 2018 / 5:03 PM / 2 months ago

UPDATE 1-ICE to launch Houston oil contract, building on export growth

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July 17 (Reuters) - Intercontinental Exchange on Tuesday said it would launch a crude oil futures contract deliverable in Houston later this quarter, capitalizing on the growth in U.S. exports of crude oil that have risen to about 2 million barrels a day.

Houston has become the pricing center for U.S. crude oil production and exports, and the new contract is designed to serve hedging and trading opportunities in that market, ICE said in a statement.

ICE said the Permian WTI futures contract will provide price discovery, settlement and delivery at Magellan Midstream Partners terminal in East Houston.

Brokers and market participants said the Houston crude market has ample liquidity as Gulf Coast grades are regularly traded by exporters and foreign buyers of U.S. crude. ICE’s move is expected to boost liquidity further and make hedging for export cargos more flexible.

Companies are currently spending millions of dollars building infrastructure to facilitate trading and storage up and down the Gulf Coast, and producers are increasingly shipping crude directly to seaports such as Houston.

A new futures contract in Houston “should only help the Permian assets develop more quickly,” said John Kilduff, partner at energy hedge fund Again Capital LLC in New York. “It’ll enable banks and other lenders to know where they stand on the value of Permian crude.”

Banks could use the forward curve of the futures contract to assess the value of proposed infrastructure projects in the Permian, he said.

The primary U.S. futures contract takes delivery at the storage hub in Cushing, Oklahoma, and has been doing so since the contract was started in the early 1980s. Storage there has been declining of late in a sign of the hub’s waning influence as the primary measuring stick for the U.S. oil market.

“Although Cushing is a marker for local crude fundamentals in the mid-continent, it diverges for pricing waterborne U.S. crude,” said Jeff Barbuto, vice president of oil markets at ICE.

Speculative trading could increase sharply in the Houston market if traders decide it is “a viable product,” said Tariq Zahir, crude trader and managing member at Tyche Capital in New York.

“We’re in a wait-and-see mode,” Zahir said. “Are banks really going to be behind it? Are there going to be large market makers in it? We’ll watch it.” (Reporting by Nallur Sethuraman in Bengaluru, Collin Eaton in Houston and Devika Krishna Kumar in New York Editing by Steve Orlofsky and Chris Reese)

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