U.S. Oil on The Auction Block

At a Glance

  • U.S. oil traded in an electronic auction for the first time in March, with 17 energy companies participating
  • Auction enables U.S. exporters to reach international audience

The U.S. shale revolution has turned the global energy markets upside down.  The U.S. has become one of the largest oil producers on the planet and is fast becoming a major force in the export market.

The shale revolution was driven by pioneering technology that unlocked oil and gas that was traditionally considered uncommercial to develop.

The rapidly changing nature of the U.S. energy sector continues to encourage the uptake of innovative technology solutions.  The latest breakthrough is the launch of an electronic auction system for U.S. oil.

The technology was provided by CME Group and adopted by U.S. energy giant Enterprise Products Partners LP.  An initial auction of U.S. crude oil destined for the export market was held on  March 5, attracting interest from 17 firms from around the world.   Glencore was the winning buyer at the first auction, taking delivery of a cargo priced at $0.46 premium to the physically-delivered WTI Houston futures contract.   A second successful auction took place on  April 4.

Strong Reception

The March 5  auction was the first time in history that U.S. oil had been traded on an electronic auction platform and the response from the market was positive.

U.S. exports are growing so quickly that trade routes are being remade.  Potential buyers from Asia and Europe are having to quickly learn about U.S. crude oil, particularly its quality and logistics.  International refiners are also having to get to know the U.S. oil producers and to build relationships with them.

Electronic auctions can act as an intermediary between buyer and seller by allowing international buyers to bid for U.S. oil on a fair and equal basis.  Equally, an electronic auction allows U.S. exporters to reach the widest possible audience around the world, maximizing the value of their crude oil.

The auctions have a further benefit to the broader market.  By increasing the transparency of the price of U.S. exports, international buyers are better able to judge the relative value of importing U.S. crude compared with oil from other regions such as the North Sea or West Africa.  Greater transparency will help to encourage the take up of U.S. crude oil around the world.

Spotlight on Houston  

Successful bidders in the electronic auctions will receive their crude oil ready to load onto a vessel in the Houston area, which has emerged as a key location for U.S. exports.

Infrastructure in the region is developing at breakneck speed as pipeline and terminal operators push to keep up with soaring U.S. production and the need to export.

Last November, CME Group launched a physical crude oil futures contract based on three Houston terminals that allows customers to manage their exposure to U.S. exports.  The new contract also allows traders to manage price differences between Houston and the epicenter of U.S. oil in Cushing, Oklahoma, the delivery point for WTI futures.

The recent launch of electronic crude oil auctions, whose floor price is linked to WTI Houston, adds yet another element to the growing trading ecosystem in the U.S. Gulf.

The Hammer Falls

The energy markets have not experienced disruption on the scale of the shale revolution, at least not since the very early days of the oil era.

The transformation in U.S. production levels has been driven by technical innovation so it is fitting that innovation in the form of electronic auctions and new derivatives contracts is helping the shale industry to maximize its global reach.

Ingenuity has taken the U.S. energy industry to fresh highs, long after it was written off as in decline.  Innovation and improvements are the lifeblood of the shale revolution and it will be fascinating to watch the impact of these latest developments.

is Global Head of Research at CME Group. He is based in London.

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