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The world's two largest energy exchanges have led their fierce rivalry in Houston, Texas, in pursuit of their commercial activities related to the millions of barrels of oil shale arriving daily in the city.
Last year, exchange traders CME Group and Intercontinental Exchange launched futures contracts to track the price of West Texas Intermediate crude delivered to the coastal city.
The battle between contracts – dubbed WTI Houston and Permian WTI – reflects Houston's growing status as a nerve center for energy trading, as US oil production breaks records, Texas refineries increase capacity and crude exports increase considerably.
At present, oil markets in the Gulf of Mexico region do not have widely traded derivatives contracts, which poses a potential problem for companies trying to protect themselves against risk. Contracts leading to a physical delivery to Houston would be a specific tool reflecting the emergence of the city as a bridge between the national and international markets, scholars said.
The challenge is to have the next major oil contract, which some say could be an important source of money for both exchanges. CME of Chicago and ICE Atlanta have earned billions of dollars since the creation of the world's two major oil markets – WTI and North Sea Brent, respectively – three decades ago.
"This is not our average contract," says Jeff Barbuto, global oil marketing manager at ICE. "US barrels will become increasingly relevant to global oil flows."
ICE and CME stock exchanges have been competing in crude oil futures since the 1980s. ICE's Brent Crude benchmark is based on North Sea supply. CME's light, sweet WTI reference is delivered to the Cushing, Oklahoma storage facility – a small town about 500 km north of Houston.
Sometimes the price of oil in Houston is disconnected from that of the North Sea, Cushing or both, suggesting that new contracts may be useful for companies selling oil there. Volumes have picked up in recent weeks.
"We follow the example of business customers who tell us both their investments and their marketing when they need to manage their risks," said Peter Keavey, global energy manager at CME. .
The contracts present somewhat different opportunities for each exchange group. Houston Trading complements CME's flagship oil contract. "The key reference is WTI-Cushing," says Keavey.
For ICE, Houston is a potential bridgehead in the US crude oil market, where its main contract is a "look-alike" that tracks CME's WTI price. "ICE would like this contract to be gigantic," said Campbell Faulkner, chief data badyst at OTC Global Holdings, a Houston-based energy broker.
Academic research has shown that new futures contracts may fail if they are not much more effective in reducing risk than existing futures contracts, says Hilary Till, director at Premia Research in Chicago.
She cites Economist Holbrook Working's conclusion that commercial traders would choose a custom futures contract – such as WTI-Cushing to manage risk in Houston – if it protected it against extreme losses and the cost to enter in and out of the market was weak.
CME's WTI-Cushing and ICE Brent are already highly traded markets with daily volumes hundreds of times greater than Houston's contracts.
"The history of well-designed forward contracts that have not gained ground is very long," said Ms. Till.
The new CME contract is delivered to Houston terminals owned by Enterprise Products Partners. Its rules require an oil with a density, or density, which is measured in a narrow band of 40 to 44 "degrees". The oil must not contain more than 0.275% sulfur and four parts per million nickel, vanadium and metals.
The ICE contract is delivered to Houston-owned Magellan Midstream Partners terminals, whose specifications allow for an oil with a wider gravity band of 36 to 44 degrees and a sulfur cap of 0.45%.
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"We have a stricter specification," said Keavey, CME.
However, ICE publishes average monthly mean gravity, sulfur and metal surveys to demonstrate the consistent quality of the WTI that underpins its contract. The unmixed crude comes from pipelines coming directly from oil fields in the Permian Basin in western Texas, according to the trading company.
"We really believe that quality control, from the wellhead to the sea, will make the difference," said Barbuto.
Dennis Sutton, executive director of the Crude Oil Quality Association, an industry group, says the ICE reports "could make me think the quality is better," but he said the numbers were averages that could mask the variations in day to day.
"If rude buyers would ask me which one should I buy and how much should I pay, I should use models with more sophisticated linear program models to find the answers," says Sutton, former – Marathon Petroleum worker. executive.
The pressure to set a crude oil price standard on the Gulf Coast comes as S & P Global Platts, whose North Sea price badessments are part of the physical trading market, is considering the opportunity of 39, integrate other streams of sweet and light oil to its daily snapshots of the Northwest. European market.
This could include US light crude oil captured by Houston contracts, saying Platts that it has witnessed a "steady trade flow" from the region. The Platts Dated Brent benchmark is intrinsically linked to the Brent ICE futures, which together contribute to the formation of benchmark prices for the majority of seafarers' exchanges worldwide.
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