The U.S. Crude Oil Grades Market Is Surging

For over 35 years, NYMEX WTI Crude Oil futures (WTI) was virtually the only U.S. crude oil futures contract around.   Oil production in the U.S. had peaked in 1970 and then began a steep decline for the next 40 years.  The U.S. domestic crude oil market was a sleepy place, by and large, with no prospects for growth.  The WTI price was the only liquid and transparent indicator in the marketplace, and all the U.S. crude oil grades were priced as a differential to the reliable WTI benchmark.

This all began to change in 2010 when crude oil strategies started to be developed in the Permian Basin, Eagle Ford and Bakken regions.  The decline in oil production made a stunning turnaround and in December 2016 the U.S. began to allow exports of crude oil.  U.S. crude oil exports nearly doubled in 2017 to average over one million barrels per day (b/d), up from 600,000 b/d in 2016.  In May 2018, crude oil exports increased to 2.1 million b/d, according to the the Energy Information Administration (EIA).

This impressive growth in exports has been transformative for the U.S. crude oil market.  Houston has become a major export hub, and new infrastructure has been constructed to process the growing export volumes.  These infrastructure changes have transformed the U.S. into the marginal supplier of oil to the world.  As a result, the U.S. domestic crude oil grades market has been transformed from a sleepy, regional market into a vibrant and international marketplace with active participation from Europe and Asia.  This transformation has been driven by rising U.S. crude exports and surging domestic oil production.

Further, the market liquidity of WTI futures has spurred growth in the spread trading activity for the four U.S. domestic crude oil grades: WTI Houston, WTI Midland, Light Louisiana Sweet (LLS), and Mars. This helps to ensure better price discovery in setting the basis differential for the grades market.  The WTI benchmark at Cushing, Oklahoma provides a reliable anchor as the flat price reference for the crude oil grades, and allows for more reliability in the price mechanism based on active spread trading.

Today, the U.S. crude oil grades are important benchmark prices in the international marketplaceAs U.S. oil exports gain deeper penetration in the global oil markets, the U.S. crude oil grades will continue to expand their importance as key price references. For more on how each grade is playing a role in the global marketplace, read our full report.

Average daily volume is for the 6-months Oct 2017 through March 2018;  Open Interest as of April 30, 2018.


Dan Brusstar is senior director of energy research and product development at CME Group.

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