Trading HCL: An Overview of WTI Houston Contracts

  • 22 Oct 2018
  • By Daniel Brusstar
  • Topics: Energy

Trading HCL: An Overview of WTI Houston Contracts

NYMEX is launching new physically-delivered WTI Houston futures and options contracts that will provide a superior hedging tool for the expanding U.S. export market. The WTI Houston futures contract delivery specifications are designed to mirror the lighter export grade of WTI with API gravity of 40-44 degrees and lower sulfur of 0.275% by weight. In addition, the new contract features lower metals content with vanadium levels below 4 parts per million (ppm).

Further, the new WTI Houston futures and options contracts feature physical delivery free-on-board (FOB) at three Enterprise Products LP terminals with waterborne marine access geared for the export market. The FOB delivery mechanism will allow importers and exporters to make and take delivery of export-grade WTI dockside in Houston at a price that reflects the true value of waterborne ship loadings in the U.S. Gulf Coast market.

The new physically-delivered WTI Houston futures contract also provides the flexibility to trade WTI Houston versus WTI Cushing as an exchange-listed spread on CME Globex. This mirrors how WTI Houston trades in the underlying cash market and will provide access to the deep liquidity of the WTI Cushing futures contract. Further, the WTI Houston options contract will provide an American-style option as a hedging tool that features physical exercise directly into the underlying WTI Houston futures contract.

Physical Delivery Mechanism for WTI Houston Futures Contract

The new WTI Houston futures contract provides for physical delivery FOB at three Enterprise Products LP terminals with waterborne access: the Enterprise Echo terminal; Enterprise Houston Ship Channel terminal or  Enterprise’s Genoa Junction in Houston, Texas. The three Enterprise terminals are connected to all the major in-bound pipelines and refineries in the Houston area, and provides out-bound access to the largest export terminal in the Houston market.

The Enterprise Houston Ship Channel terminal has 24 million barrels of storage capacity and is the major export facility in the Houston area, with seven ship docks that can load tankers up to 900,000 barrels capacity. In addition, the Enterprise Echo terminal has 8 million barrels of storage capacity and is connected to a network of nearly a dozen pipelines and 10 storage terminals. Further, the Enterprise Genoa Junction facility provides an interconnection point for delivery of pipeline barrels flowing from Midland, Texas via the Enterprise Products, BridgeTex, and Longhorn Pipelines. The Enterprise Genoa Junction terminal also provides for in-bound delivery of crude oil from the Magellan East Houston terminal.

The export grade of WTI in Houston is a fungible blend of domestic light sweet streams with quality parameters of 40 to 44 degrees API gravity maximum and 0.275% sulfur maximum, which are slightly lighter than the WTI specifications in Cushing. The contract specifications for WTI type crude oil for delivery in Houston represent the export quality that is lighter than WTI at Cushing and mirrors the specifications for WTI type crude oil at the export terminals in Houston.

Anatomy of the WTI Houston Market

The trading activity in the WTI Houston cash market is driven by in-bound pipeline flows sourced mainly from West Texas. There are substantial pipeline inflows of WTI type crude oil to the Enterprise delivery terminals from the two major oil production centers in the Permian Basin and Eagle Ford areas in West Texas: from Midland, Texas via the Enterprise Products, BridgeTex, and Longhorn Pipelines; and  from the Eagle Ford production area in South Texas via the Enterprise Products and Kinder Morgan Pipelines. Table 1 below outlines the in-bound pipeline capacity for crude oil flowing from West Texas to Houston.

Table 1: In-bound Crude Oil Pipelines Connected to Enterprise’s Three Houston Terminals Capacity expressed in Barrels/Day

Incoming Pipelines Capacity Owner
BridgeTex Pipeline (from Midland)  400,000 Magellan
Longhorn Pipeline (from Midland) 275,000 Magellan
Enterprise’s Sealy Pipeline (from Midland) 600,000 Enterprise Products LLC
Enterprise’s Sealy 2 Pipeline (from Midland) 240,000 Enterprise Products LLC
Enterprise Products Eagle Ford Pipeline 560,000 Enterprise Products LLC
Kinder Morgan Pipeline (from Eagle Ford) 350,000 Kinder Morgan
Seaway Pipeline (from Cushing) 850,000 Enterprise
Keystone MarketLink (from Cushing) 700,000 Transcanada
Total In-Bound Capacity: 3.95 Million Barrels/Day

Source: Enterprise Products LP, as of September 2018

The export-grade of WTI in Houston is lighter than the WTI specifications at Cushing and matches the quality of the WTI type crude oil at the export terminals in Houston. These lighter specifications are tailor-made for Asian and European importers who are major participants in the Houston export market. The new physically-delivered WTI Houston futures contract will provide a superior hedging tool for the U.S. export market that reflects the fair value of waterborne loadings in the U.S. Gulf Coast market.

Contract Features:

Contract Title WTI Houston Crude Oil Futures WTI Houston Crude Oil Option
Rulebook Chapter 201 202
Commodity Code HCL HCO
Listing Schedule Monthly contracts listed for the current year and the next 3 calendar years. List monthly contracts for a new calendar year following the termination of trading in the December contract of the current year. Monthly contracts listed for the current year and the next 3 calendar years. List monthly contracts for a new calendar year following the termination of trading in the December contract of the current year.
Contract Size 1,000 barrels 1,000 barrels
Settlement Method Physical Physical (American-Style)
Minimum Price Fluctuation $0.01 $0.01
Value per Tick $10.00 $10.00
First Listed Contract January 2019 January 2019
CME Globex Match Algorithm First-In, First-Out (FIFO) First-In, First-Out (FIFO)
Block Trade Minimum Threshold 5 contracts 5 contracts
Termination of Trading Trading terminates 3 business days prior to the twenty-fifth calendar day of the month prior to the contract month. If the twenty-fifth calendar day is not a business day, trading terminates 3 business days prior to the business day preceding the twenty-fifth calendar day of the month prior to the contract month. Trading terminates on the third business day prior to the termination of trading in the underlying futures contract month.
Strike Price Listing Rule   Dynamic strikes at $0.50 per barrel strike increment
Strike Increment $0.50 per barrel
Exercise Type American

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