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Liquidity builds on WTI crude diverted to E. Houston

By Catherine Ngai

(Reuters) - The sleepy market for sweet West Texas Intermediate crude for delivery close to East Houston's refineries is beginning to wake up.

This week alone, more than four spot deals with a delivery point in East Houston have been done for physical volumes of WTI, according to five market participants. Until recently, most East Houston WTI trades were generally medium-term deals for six months or more, the sources said.

Traditionally, physical WTI has been traded with a delivery point at Midland, known as Midi, the main storage hub for the Permian Basin in West Texas, or in Cushing, Oklahoma, the basis for the U.S. benchmark light sweet crude oil futures contract.

Liquidity for WTI at East Houston has picked up as pipeline capacity grows connecting the Permian Basin to the coast, marking an "evolution" of the market that should allow for better pricing transparency in a region, one trader said.

The growing popularity of sending crude to East Houston could be the start of an industry trend that may eventually reduce the relevance of Midland. Before that can happen, East Houston needs much more storage space and better quality control.

As the market has become more liquid, brokers have been able to strike spot deals to take advantage of the logistical benefits of East Houston deliveries. Increased infrastructure is creating a more liquid market, though analysts say there is still no benchmark.

"The connectivity to the Gulf Coast has gone up," said Amit Jain, a crude oil analyst at Citadel LLC.

"East Houston is important because it's a consumption point, but also because the refineries are there. The problem though is that there is no real (price) benchmark at this point, (at least) not one that's liquid enough."

INCREASED CONNECTIVITY

The new infrastructure includes the expansion of Magellan Midstream Partners' Longhorn pipeline by 50,000 barrels per day for a total capacity of 275,000 bpd.

Magellan's BridgeTex Pipeline, a 450-mile pipeline from Colorado City in the Permian Basin to Houston-area refineries, is expected to be online by the third quarter, a spokesman said last week. The 300,000 bpd pipeline will run to a 1.4 million barrel storage terminal in East Houston.

One challenge for the East Houston hub is the relative lack of commercially available storage capacity.

"Looking at the Magellan terminal, it's got maybe 3.5 million barrels of storage space. That's not a lot when you compare it to Midland, which has around 10 to 15 million barrels of storage," said Sandy Fielden of the RBN Energy consultancy.

Another issue has been quality control, with a number of refiners citing a trend toward increasingly light WTI.

Magellan's chief executive said the firm changed specifications on its Longhorn pipeline in the "last month or two" concerning the pipeline to allow for shipping lighter grades. A spokesman said the company increased the gravity specification, but did not specify a particular API grade.

(Reporting by Catherine Ngai. Editing by Jessica Resnick-Ault.)

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