CME still studying launch of U.S. Gulf Coast futures contracts

Reuters

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By Kristen Hays

HOUSTON, Dec 11 (Reuters) - CME Group is stepping back from the launch of two new crude oil futures contracts to further assess U.S. oil production and infrastructure growth and how it boosts liquidity in Gulf Coast spot markets, executives said on Wednesday.

A light-sweet crude contract and a Canadian heavy crude contract in Houston are still possibilities, said Dan Brusstar, senior director of energy products at CME. But they will not be introduced by the end of 2013, as he said earlier this year.

"We're definitely looking at that opportunity in the next year," he told reporters. "It's a work in progress."

The company wants to launch a Gulf Coast crude futures contract to take advantage of the region's rapidly growing center for trade. It would complement the U.S. benchmark West Texas Intermediate crude futures contract, which is tied to the Cushing, Oklahoma, hub.

The Gulf Coast growth comes as burgeoning U.S. and Canadian oil production pushes more crude to the region, either directly or from glutted Cushing, chipping away at imports that largely fed the nation's biggest refining area just a few years ago.

The company wants more time to seek customer input, monitor the market's liquidity and assess options as more storage, terminals, pipelines and rail projects emerge on the U.S. Gulf Coast, from Houston to Louisiana.

"The key is having multiple people in the market, competition, and some optionality and flexibility mechanism so you can accommodate refiners, traders and marketers in that hub," Brusstar said.

Gary Morsches, managing director of global energy at CME, added during a luncheon on Wednesday with reporters that choosing a hub for a new contract is as much art as science.

"We take our inferences on where the market is trading, where the activity is, and where the need is," Morsches said.

MULTIPLE HUB CHOICES

Two years ago CME said it would work with oil market participants to develop a new physically-delivered Gulf Coast crude futures contract at Enterprise Products Partners' Enterprise Crude Oil Houston (ECHO) storage and distribution complex in south Houston.

That announcement came as CME's flagship New York Mercantile Exchange (NYMEX) crude contract had lost ground to IntercontinentalExchange's European Brent futures .

Since then ECHO, a major delivery point for output from the Eagle Ford shale and Permian Basin in Texas, opened 750,000 barrels of storage. The terminal also is expanding tankage to more than 6 million barrels with direct connections to major southeast Texas refineries with an aggregate capacity of 3.6 million barrels per day.

Also, next month's startup of a pipeline connecting Enterprises' 400,000 bpd joint-venture Seaway pipeline to ECHO will bring in flows of WTI and Canadian heavy crudes from Cushing as well.

But ECHO isn't alone. Brusstar noted other possible hubs seeing oil infrastructure growth that could be home to new contracts include the Louisiana Offshore Oil Port (LOOP) and the growing crude-by-rail and pipeline hub in St. James, Louisiana.

Royal Dutch Shell's reversed Houston-to-Houma crude oil pipeline, which is filling with crude in anticipation of a mid-December startup, will bring Texas crudes to the LOOP area "and open up new opportunities for the LOOP to develop as a trading hub," Brusstar said.

More pipelines moving Canadian heavy crude to the Gulf Coast open the same opportunity for a Western Canadian Select contract on the Gulf Coast, he said.

TransCanada Corp's new 700,000 bpd Gulf Coast pipeline from Cushing to Texas has begun filling with crude as well, and is expected to start moving Canadian crude south in mid-January.

Seaway's twin line, which will expand its capacity to 850,000 bpd, is slated to start up in the first half of 2014, and by mid-2014 Enbridge Inc's 600,000 bpd Flanagan South pipeline will push more Canadian crude into Cushing for Seaway and TransCanada's pipelines to move it to the Gulf Coast.

"You'll see a lot more trading going on, and that will open up some opportunities for us to list some new contracts," Brusstar said.

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