The Crude Report: DJ Light hosts Cushing crude party

Author Argus

As increasing and more diverse light sweet Denver-Julesburg (DJ) crude volumes are delivered into Cushing, Oklahoma, from the Rocky Mountains, a need for better pricing has become all the more important.

And now more buyers than ever are depending on spot supplies due to variable lease supplies and fewer evergreen and term contracts.

In order to meet the needs of this changing market, Argus launched the DJ Light Cushing price on 28 June – which includes trades on four DJ Basin streams at Cushing – to better represent this market.

Webinar: Global crude oil markets - 2021 mid-year review

Transcript

Gus Vasquez: Hello, and welcome to "The Crude Report", a podcast series on global crude oil markets by Argus Media. I'm Gus Vasquez, and I'm the editor of The Americas Crude Report. And joining me today is Alex Endress, our senior market reporter that covers several prices in the U.S. Mid-Con and the Gulf Coast. So, today we're going to chat about how more light sweet crude from the DJ Basin in the Rockies is arriving in Cushing, Oklahoma.

That's happening both in terms of volumes, and in the great diversity that we see. Argus has traditionally assessed this market by using its White Cliffs Cushing price that we first launched in September of 2016. But as things have changed, Argus has now launched a new instrument called a DJ Light Cushing index, and we launched that on the 28th of June to include traits on four DJ Basin streams at Cushing. We did this in order to better represent this market. So Alex, to start with, why don't you tell us a little bit about what's driving this change and the increase that we're seeing in the Cushing market.

Alex Endress: Thanks, Gus. Of course. So, the first thing that we've been hearing is that more buyers are depending on spot supplies due to variable these supplies and fewer Evergreen in-term contracts. On a general level, this is something that we've also seen for other Mid-Continent markets, such as the Cushing Domestic Sweet market and the West Texas Intermediate market in Midland.

Gus: And Argus, of course, does cover those other markets so we do have that WTI Dev-to-CMA [SP] price that we publish for Cushing. And then we have the WTI Midland price in west Texas. And for both of those, if I'm not mistaken, we've seen in the past year that there's been record monthly spot volumes.

Alex: Yes, absolutely. We have seen that. And this dynamic that we've seen has really materialized following a wave of lease contract cancellations after the NYMEX negative settlement price, of course, on April 20th of last year. And on top of that, it also looks like the midstream companies that service this DJ Basin region particularly are looking to push their volumes.

Gus: Okay. So let's talk about those DJ Basin volumes. Which streams are we seeing in that Cushing market then?

Alex: So we're talking about Saddlehorn Light, Grand Mesa Light, Pony Express Light, and of course, White Cliffs. And things have changed a good bit since Argus launched the White Cliffs price assessment in 2016. Total White Cliffs pipeline volumes have been trending downward after one of two, 12-inch White Cliffs pipelines that shipped this DJ crude from Colorado to Cushing was shuttered in 2019 to prepare for NGL's service.

Gus: Right. And since then, what we're seeing now is that most of the spot deliveries are coming from Magellan Midstream Partners, right? Because they have that one, is it 290,000-barrel-per-day Saddlehorn pipeline?

Alex: Yes. And so that moves crude from Carr and Platteville and Colorado to Cushing. Magellan recently completed a 100,000-barrel-a-day expansion on the line, which was mentioned in February during the company's fourth-quarter, 2020 earnings call.

Gus: Right. And then Energy Transfer basically said something along those same lines, more or less, right?

Alex: Yeah. Well, Energy Transfer, so it will be moving an additional 65,000 barrels a day to 125,000 barrels a day from the White Cliffs pipeline and their storage terminals at Cushing down to Nederland, that's what they said in their fourth-quarter earnings call. And they said the changes needed to move that additional crude would have been completed in the second quarter.

Gus: Right. And then of course there's also Tallgrass.

Alex: Yeah. And Tallgrass is seeking shippers actually for expansion capacity on the Northern segment of its 400,00-barrel-a-day Pony Express crude pipeline from its origin at Guernsey, Wyoming to Sterling, Colorado.

Gus: Okay. So we basically have these different systems that are all delivering into Cushing, but would you say that despite it being on different systems, the quality or the type of this light sweet barrel that we're seeing is essentially the same?

Alex: Well, quality-wise, we know that each grade is simply the lightest crude carried by the system. So the grades can closely resemble condensate. We even see in some cases, heavier specifications that are overlapping with this lighter crude, and the heavier crude would obviously garner a higher price, which just incentivizes more grade segregation, with only the highest API crude feeding into these grades that we've mentioned.

Gus: Okay. So yeah, if we look at these grades then, what we essentially see, and we saw this right, as we were building up to the launch of this new price, is that the market essentially treats them as if they were the same barrel. Especially when they get to Cushing, right? And then now, of course, with the launch of that DJ Light price, what we have here is an instrument that allows to track the price of all these grades and combine them into a single price. And again, just to reiterate, we only launched this very recently, right? So only in late June to align with the beginning of the August trade month.

Alex: Yes, that's right. And you know, if we look at it on a day-by-day basis, we may see what we would call a normal day's range of trade between these grades. But of course, if we look at the month-to-date averages for White Cliffs Cushing and for DJ Light Cushing, and we track them for August up until July 8th, which is the day prior to our recording of this podcast, it's almost exactly the same with a difference of less than a penny.

So, of course, we saw a similar trend prior to launching this assessment, which really confirmed to us the similarities between these grades, and looking at how the market treats them in Cushing. And by including all these grades within one volume-weighted average assessment, we can be sure that we will have the largest representation of DJ Basin liquidity in the Cushing market, despite any future infrastructure changes or any other unforeseen changes to market dynamics.

Gus: Right. And of course, this is not new to Argus. Argus has used a methodology that looks like this before, specifically for the heavy sour markets in Cushing, and the U.S. Gulf Coast. The classic example here is WCS. We do have a price for that Canadian heavy at Cushing and Houston. And both of those prices actually started as an assessment that only included transactions done for WCS turned into a volume-weighted average.

But we saw that as the market evolved and different kinds of volumes started to move, the industry approached Argus and said it would make sense to include Coal Lake into those prices. And the reason they wanted that is because again, kind of a similar argument to what you were saying Alex, that the two grades were basically the same quality by the time they got to Cushing and to Houston, and they were for the most part trading at parody to each other.

So what the industry wanted at that point was to have all of that liquidity included in a single price, because then that makes for a more robust representation of what is actually happening in the spot market. And as it turns out, that was clearly the right thing to do, because now we do have financial swaps contracts that are tied to both the WCS Cushing and WCS Houston Argus assessments.

Alex: Yes. And so, you know, when we look at these DJ grades, we expect the market to continue to treat them as the same type of barrel of Cushing and we don't expect any divergence. However, we do understand that things can change and so in the future, if that happens similar to the WCS market, we have a methodology that would account for this, should there be a considerable and sustained change.

Gus: Right. So when we get down to it and we just kind of boil it all down, this DJ Light sweet market is essentially very different from what we saw five years ago when White Cliffs was launched by Argus. And so what we're doing here is we're trying to set up an instrument that can capture more volume, more liquidity, and we'll be there and in place to capture whatever happens when we go into the next stage, right, as things progress and we maybe see more volumes and so on.

Alex: That's right. Yeah. I mean, by capturing the bulk of the liquidity that Argus wasn't including in the past, DJ Light will be bolstered by just more consistent daily trade volume, and the Cushing market.

Gus: Which is really interesting, right? This is still evolving and changing, so I think we can all agree that this is an interesting marker to watch and to keep tracking as we go forward. And that essentially brings us to the end of our very short discussion on this topic. But I would like to thank you, Alex, for joining me and shedding some light on some of the issues around this.

Alex: Sure. Glad to chat about it, Gus.

Gus: All right. And for our listeners, that's basically the end of our podcast, but if you're interested or are in need of more in-depth daily coverage of the U.S. Mid-Con and crude markets, please do consider subscribing to Argus Americas Crude. You can find more information on this service at www.argusmedia.com. Thanks again for tuning in, and we look forward to you joining us the next time for our next episode of "The Crude Report."

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