An aerial view of a crude oil storage facility is seen on May 5, 2020 in Cushing, Oklahoma.
JOHANNES EISELE | AFP via Getty Images
Two leading oil price reporting agencies separately launched new U.S. crude benchmarks on Friday, as part of an effort to rival the U.S. West Texas Intermediate futures contract.
The move from S&P Global Platts and Argus Media comes as both agencies seek to break away from the traditional landlocked system, just over two months after U.S. crude futures plunged into negative territory for the first time in history.
S&P Global Platts said its new benchmark for U.S. crude, called Platts American GulfCoast Select (AGS), would reflect the value of waterborne light sweet crude supplied from the Permian Basin in west Texas and New Mexico on major pipelines to the Gulf.
Argus’ new outright daily crude price assessment, Argus AGS, is also designed to reflect the growing importance of the U.S. Gulf Coast as a major export hub and to address ongoing market concerns about the landlocked WTI crude benchmark.
The agencies will use different methodologies for their new respective price assessments.
International benchmark Brent crude futures traded at $41.15 a barrel on Friday afternoon, up around 0.3%, while U.S. WTI futures stood at $38.63, down around 0.2%. Both oil contracts are on pace for a weekly fall of over 1.5% after record U.S. crude inventory data on Wednesday dragged prices lower.
Why are these price assessments being launched?
Brent is priced on an island in the North Sea roughly 500 meters from the water, where tanker storage is accessible. In contrast, the delivery location for WTI is landlocked and 500 miles from water at Cushing, Oklahoma.
This difference was thought to have illustrated an important point in late April as the coronavirus shock sent U.S. oil prices tumbling, energy analysts at Goldman Sachs said at the time.
They argued waterborne crudes, like Brent, were far more insulated to the pandemic because they had comparatively easy access to tanker storage than landlocked price grades — such as those in the U.S., Canada and Russia.
An aerial view of oil tankers anchored near the ports of Long Beach and Los Angeles amid the coronavirus pandemic on April 28, 2020 off the coast of Long Beach, California.
Mario Tama | Getty Images
The Cushing hub consists of a network of nearly two dozen pipelines and 15 storage terminals, according to CME Group. The hub has 90 million barrels of storage capacity and is often referred to as “The Pipeline Crossroads of the World.”
S&P Global Platts said in a statement that it had decided to launch AGS on receiving feedback from producers, consumers, traders and others in the U.S. oil market calling for a new crude pricing benchmark that directly reflects U.S. light sweet crude’s value in the global market.
Vera Blei, global director of oil at S&P Global Platts, said AGS would bring the U.S. market “a Brent of its own.”
“This new benchmark reflects the value of U.S. crude oil that is on the water, internationally connected and free from the distortions of domestic infrastructure economics,” she added.
On April 20, WTI oil futures tumbled into negative territory for the first time on record, falling as low as negative $40 a barrel as the economic fallout of the pandemic led to an unprecedented demand shock.
The IEA’s Executive Director Fatih Birol has since reportedly suggested that 2020 may come to be seen as the worst year in the history of global oil markets, with “Black April” likely to be the worst month ever experienced by the industry.
“The U.S. crude oil market has been crying out for an alternative to the discredited logistics of Cushing, Oklahoma,” Richard Swann, editorial director, Americas, at S&P Global Platts, said in a statement.
“Cushing has for several years failed to represent the economics of crude oil in this market. Market participants have called for a benchmark that correctly reflects the core of the physical market in the Gulf Coast, rather than a landlocked financial value,” he added.