The Intercontinental Exchange Inc. (NYSE: ICE) announced plans Tuesday to launch a Permian West Texas Intermediate (WTI) crude oil futures contract with delivery in Houston. The contract is expected to launch this quarter on the ICE U.S. Futures once it receives regulatory approval.

The new contract was almost inevitable. Beginning about a year ago, the U.S. benchmark WTI contract deliverable in Cushing, Oklahoma, began to trade at a significant discount to WTI delivered to Houston. While that discount has fluctuated some in that time, it has reached as much as $5 a barrel in favor of Houston-delivered crude.

The WTI-Cushing contract always has been a domestic benchmark but delivery to Cushing from the Permian Basin prices the crude for domestic pipeline delivery only. To export the oil it must get to the Gulf Coast (either Houston or Corpus Christi) and that incurs transportation expenses that have to be taken into account in the final price.

Permian Basin crude also is running up against a capacity limit on pipelines moving crude either to Cushing or Houston. Production remains at high levels, but transportation from the Permian to Cushing knocked $13 a barrel off the benchmark WTI price Tuesday. At the same time, WTI delivered in Houston paid a premium of more than $1.50 a barrel to the benchmark price.

In its announcement, ICE Vice-President Jeff Barbuto said:

The U.S. Gulf Coast, with Houston as its trading hub, is the natural delivery point for a North American crude oil benchmark based on WTI from the Permian Basin. … The recent price divergence between Cushing-based WTI and Brent is a reminder that although Cushing is a marker for local crude fundamentals in the midcontinent, it diverges for pricing waterborne U.S. crude. We are working with the market to provide a reliable and predictable quality specification and location that is relevant to global crude pricing, and accessible for domestic and foreign buyers alike.

Permian Basin production totals around 2.8 million barrels a day, and every single one of those barrels would prefer a trip to Houston rather than Cushing. By late next year, pipeline capacity to Houston and Corpus Christi will have increased by at least a million barrels a day.

The Houston WTI delivery point is the Magellan Midstream Partners terminal.

Last month U.S. crude oil exports reached an all-time high of 3 million barrels a day and currently average around 1.8 million barrels a day over the past 12 months.

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