By Robert Campbell NEW YORK, May 11 (Reuters) - Offers of domestic sweet crude (oil that can be delivered against the West Texas Intermediate crude futures contract) on the Houston waterborne market are the clearest sign yet that the North American oil market transition is entering a new phase. These are the first baby steps towards inland North American sweet crude taking over the entire Gulf Coast market, and possibly pushing up to the East Coast as well. Let's not get ahead of things here, though. There are plenty of infrastructure and legal restrictions that stand in the way of this trade getting done. It's one thing for a trader to offer a parcel of crude to load from a wharf. It is another for the deal to get done. Particularly when U.S. law prohibits the export of most crude oil. Which, in turn, means the crude will have to move on costly U.S.-flagged tankers to get from the Houston area to another U.S. port. The fact of the matter is that it may be a long time before any WTI on offer actually makes it onto a tanker. Plenty of buyers in the Houston area have a competitive advantage over other potential buyers due to their much lower shipping costs. But what is clearly happening is a metamorphosis of the "Cushing syndrome," whereby the inland North American crude markets are flooded with sweet crude oil. Houston and parts of the Gulf Coast may now be about to join this club. HO-HO AND CANADIAN CRUDE For now the logical buyers for Seaway-origin light sweet crude are in the Houston area. U.S. government data for February shows foreign light sweet crude oil going to area refineries belonging to Phillips 66 , BP, Valero, Citgo, Petrobras and the Shell-Pemex joint venture refinery at Deer Park, Texas. So there are plenty of customers who have a huge logistical cost advantage over more distant buyers. We may not ever see WTI actually go on a tanker this year. Even though Seaway is due to expand to 400,000 bpd by the end of 2012 or early 2013, Royal Dutch Shell's Ho-Ho reversal project could easily absorb a large increment in supplies. Shell wants to reverse the direction of its Houma-to-Houston pipeline that currently moves crude from Louisiana to Houston by the first quarter of 2013. So there is not likely to be a rush of new U.S.-flagged tankers getting built given the much lower cost of moving oil on pipelines instead of tankers. But as sweet crude supplies from Cushing and other regions, notably Texas' Eagle Ford Shale, continue to grow and build up in Houston, the possibility grows that a new glut will emerge in Houston. The prohibition on exports of U.S. crude oil and limited tanker capacity means that the market could well struggle to clear out excess supplies, particularly during seasonal refinery maintenance. Once the reversed Ho-Ho line enters service, offers of waterborne domestic sweet crude from Houston will become a critical indicator of the state of supply in Houston. If the area market gets oversupplied, discounts might fall rapidly if unwanted sweet barrels cannot be cleared out due to infrastructure constraints. Look no further than Midland, Texas and Clearbrook, Minnesota for evidence that these sorts of regional infrastructure blockages can have a huge impact on local crude pricing. But the Houston market will have a safety valve. U.S. law might ban the export of domestically produced crude oil but oil that can be shown to be exclusively foreign-origin can be exported. Thus Canadian crude may well emerge as a balancing factor at Houston. Cheap U.S. crude will encourage Canadian barrels to flow south for loading onto export tankers. If so the North American oil boom will start to touch foreign markets in a much more profound fashion.