Pipelines Help WTI Cushing Benchmark, CME Director Says

New and reversed pipelines transporting crude to the Gulf Coast from Cushing, Oklahoma, have made West Texas Intermediate oil futures a stronger benchmark, CME Group Managing Director Gary Morsches said.

Cushing, the delivery point for WTI contracts traded on CME’s New York Mercantile Exchange, has improved flexibility now that pipelines including Enterprise Products Partners LP’s Seaway and TransCanada Corp.’s Keystone South can bring crude to the Gulf Coast, Morsches said in an interview yesterday in Bloomberg’s Houston office.

The connectivity has improved price correlation between WTI and Light Louisiana Sweet, the benchmark oil on the Gulf Coast. Morsches said WTI also has more liquidity, with more than 530,000 trades a day taking place versus 600 a day for CME’s Gulf Coast contract, an LLS-WTI spread calendar swap.

“What we’re hearing the market say loud and clear is, ‘Look, I can hedge my price at Cushing and I may take on a little basis risk between LLS and Cushing,’” Morsches said. “But I need that liquidity at Cushing so I can get in, get out and really hedge my price risk.”

CME is considering a futures contract for light, sweet crude on the Gulf Coast. Aggregate open interest for the LLS swap contract has nearly quadrupled in the past two years to about 44,000. While the growth is impressive, Morsches said, it pales in comparison to the 1.7 million open contracts for WTI.

“The bigger question you have to ask yourself is does the U.S. need a Gulf Coast light sweet benchmark?” Morsches said. “We’re waiting, we’re trying to see right now.”

Some CME customers don’t want the liquidity advantage at Cushing to be diluted by a physical Gulf Coast contract, Morsches said. Others want a more liquid product there.

“We’re listening,” Morsches said. “We’re working on it.”

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