Nymex May Tighten WTI Rules as Refiners Question Crude Quality

The New York Mercantile Exchange may tighten specifications on the West Texas Intermediate oil contract, the U.S. benchmark, because refiners say existing rules fail to eliminate variability that can cut product yields.

The exchange supports a proposal from an industry group called the Crude Oil Quality Association to control the makeup of the light, sweet contract through added standards, New York- based Daniel Brusstar, director of energy research and product development at CME Group Inc. (CME), parent company of Nymex, said yesterday. The exchange is “hopeful” a quality assurance program will start at Cushing, Oklahoma, the delivery point for the contract, in the second half of 2011, he said.

As new Canadian and U.S. production floods trading hubs, characteristics that have defined domestic blended grades for decades are changing. Blenders capturing a profit by mixing cheaper grades into more expensive oils, along with an increase in storage tanks and pipeline links, are adding to deviations in WTI-tied blends, members of the quality group said.

“What people have seen in WTI is the variations have started to grow more than they are comfortable with,” said Randy Segato, a crude quality specialist for Calgary-based Suncor Energy Inc. (SU) and an adviser to the industry group. “As more pipelines grow and as more refiners grow, there is a tendency towards more variability. There are many marketers who have taken advantage of blending behind the scenes.”

Tighter Testing

Some terminal operators have started more stringent testing. Plains All American Pipeline LP (PAA) has implemented additional standards for crude batches at its Cushing terminal, the company said. Enbridge Energy Partners LP (EEP) said it plans to “increase the scope” of testing at its Cushing storage tanks.

Settlement of WTI futures, the world’s largest-volume contract trading on a physical commodity, and a global standard since it was introduced in 1983, can include six domestic crudes delivered into any terminal that is connected to Enterprise Products Partners LP (EPD) or Enbridge Energy Partners LP’s Cushing terminals, according to the Nymex. Blending foreign crude into those oils is prohibited.

“The yield on some common stream blends erases the economic incentive to process them,” said Paige Kester, vice president of refinery supply at Houston-based Frontier Oil Corp. (FTO), and a member of the quality association. “Blenders are hurting our economics, yet they are within the current specifications for domestic sweet crude.”

Physical Settlement

Less than 1 percent, or 3,248 crude futures contracts, were delivered in 2010, compared with the average open interest of 1.34 million contracts during the same period, according to Nymex and data compiled by Bloomberg. There is no physical delivery against Brent oil futures contracts traded on the London-based ICE Futures Europe Exchange.

Other oils marketed as “common domestic sweet” meet sulfur and gravity requirements of the WTI contract for light sweet crude. Separately, five foreign crude streams can be delivered at a premium or a discount against the futures contract including Brent, the European benchmark, and Bonny Light from Nigeria.

“Right now refineries have to discount WTI in their systems compared to other available grades because there is a lot of variability,” said Houston-based Anita Koval, a senior crude trader for Lion Oil Co., which operates an 80,000-barrel-a -day refinery in El Dorado, Arkansas. Tightening the rules will “improve the liquidity of the physical barrel and you’re not going to end up with a dinosaur that nobody wants,” she said.

Added Criteria

The quality association asked the exchange in August to add seven parameters to limit the amount of acid, nickel, vanadium, light ends and vacuum residuum in WTI. The group includes refiners, pipeline and terminal operators with executive board members from BP Plc and ConocoPhillips. (COP)

Light, sweet crude is less dense, contains lower amounts of sulfur and generally yields larger volumes of higher value products such as gasoline and distillate. Heavier, sour crudes are typically sold at a discount and may require more complex refinery equipment to process into fuels.

Enterprise declined in an e-mailed statement March 21 to comment on whether it plans to implement tighter restrictions on oil delivered to its Cushing terminal. The Houston-based company “will adhere to the specifications required by the Nymex,” it said in the statement.

“Historically, domestic sweet was a blend of various sweet crude oil streams from West Texas, Oklahoma and surrounding areas,” Dennis Sutton, a member of the quality association and a feedstock quality manager at Marathon Oil Corp. (MRO), wrote in an October presentation to the group in Houston. Now, because of “minimal specifications” and more interconnects, the domestic sweet crude stream might include high-acid African crudes, Canadian blends and heavy Brazilian oils, he wrote.

‘The Big Play’

Companies including Plains, The Gavilon Group LLC, SemGroup Corp. and Magellan Midstream Partners LP announced plans to build at least 15.6 million barrels of storage at Cushing by the middle of 2012. That would boost capacity as much as 28 percent from the existing 55 million barrels at the Oklahoma hub.

TransCanada Corp. (TRP) began deliveries on its Keystone pipeline link that runs from Steele City, Nebraska, to storage tanks in Cushing and has contracts to deliver about 155,000 barrels a day, Paul Miller, a senior vice president at the Calgary-based company, said Feb. 8.

“The big play, quite frankly, is you take lower-cost and lower-quality Canadian crude, and you blend it together with higher-quality sweet Oklahoma crude,” said Gordon Allott, president of BroadPeak Partners, Inc., a New York-based commodity investment bank.

Western Select

Western Canada Select, a heavy sour oil mix from Alberta, has traded at an average discount to WTI of $21.73 this year, according to data compiled by Bloomberg.

Naphthenic acids and metals are found in higher concentrations in unconventional crudes, such as those from Alberta’s tar sands, said Scott Sayles, a consultant with KBC Advanced Technologies Plc based in Houston. Acids increase corrosion in equipment and metals shorten the life of catalysts using in refining, he said.

Frontier, a refiner with plants in Kansas and Wyoming, paid a premium for unblended West Texas Intermediate crude shipped from the Texas oil wells where the grade originated.

“If you get back to the point where you are buying a specific barrel from a specific lease it’s going to be much more consistent,” said Frontier’s Kester. “We don’t want people to blend for us, that’s what we do right at the mouth of our crude units.”

To contact the reporter on this story: Aaron Clark in New York at aclark27@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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