Logistical changes drive USGC crude

OREANDA-NEWS. July 27, 2015. Volatility in the Southern Green Canyon (SGC) crude differential should continue through the second half of 2015, following erratic pricing in the first half of the year.

The absence of common storage for SGC, combined with fluctuating production levels and a lack of alternate domestic medium sour supply to Texas, has driven increased instability in the grade's value.

The differential for SGC tends to be most volatile in the final sessions of the trade month, when market participants are squaring up their books. SGC fell \\$3.05/bl in the last three days of the January trade month to \\$5/bl under WTI. May-delivery marked the highest end-of-month peak, with SGC rising \\$1.90/bl to a premium of \\$4/bl to WTI.

Prior to SGC producer BP selling the 475,000 b/d Texas City refinery to Marathon Petroleum in 2012, storage at the facility created a buffer to accommodate changing supply and demand for the Texas sour. But the refinery sale removed that storage option.

The reversal of Shell's Zydeco line in 2013 to run from Houston to Houma cut off alternate domestic medium sour supplies to Texas, which previously limited upside volatility for SGC. Shell canceled plans for the Westward Ho pipeline in May, which would have returned Mars and Poseidon shipments to Texas.

With no plans to address the causes of price instability, SGC should remain volatile in the near future. Imports are now the alternative for Texas refiners, making the Nymex WTI discount to Ice Brent one of the few constraints to a rising SGC differential. There is currently no apparent constraint to the downside. Production should continue to drive SGC. As long as there is no common storage, there is little reason to expect prices will stabilize.

Another development this year is on the light sweet crude side, with Houston in need of a price reference for the grade given greater pipeline connectivity from both the Permian and Cushing, Oklahoma. Following the reversal of Shell's Zydeco, LLS could not be shipped to Houston, thereby removing it as a pricing reference in Texas.

The market began trading Permian WTI at the Magellan East Houston terminal. Argus began assessing the crude as WTI Houston since it is representative of west Texas and midcontinent markets, as seen in the persistent premium of WTS over WTI Midland.

After launching WTI Houston in February, initially 17,000 b/d of the grade traded with four sellers and four buyers participating. Exempting a slight dip in June, volumes and participants have increased each month. As of July trade, 57,000 b/d traded among nine buyers and six sellers. Activity and participants in the WTI Houston market should increase as the market develops.