Asia faces hurdles in energy futures contract

Asia faces hurdles in energy futures contract

SINGAPORE (AFP): Asia's dream to have a popular indigenous energy futures contract to manage oil-price risks is being frustrated by key Western exchanges which have entered the market, an industry journal said.

The Singapore Oil Report, a leading industry monthly, said a vibrant informal over-the-counter (OTC) market among western banks, oil companies and brokers was also stunting the growth of a major Asian oil futures contract.

The New York Mercantile Exchange (Nymex) and London's International Petroleum Exchange (IPE) have established oil futures trading links in Asia.

IPE has been marketing its Brent Crude Futures contract through the Singapore International Monetary Exchange (Simex) since June through a mutual-offset link, while Nymex's West Texas Intermediate deals began through the Sydney Futures Exchange (SFE) in September.

The mutual-offset system allows for positions opened at the IPE or Simex to be closed out and cleared at the other, while the Nymex-SFE computerized link provides for trades to be cleared in the United States.

These links have allowed the western exchanges to gain a toehold on the Asian market, making it more difficult for regional exchanges to have their own contracts, said the report, quoting industry officials, brokers and analysts.

The lucrative 17-million-barrels-per-day Asian oil futures market is growing at three to four percent annually, said the oil report, due for release this week.

Asia's most successful contract, Simex's fuel oil, is on its deathbed after a mostly mediocre showing since its debut in 1989, the report said. Previous Simex attempts at launching Dubai crude and gas oil contracts also faltered.

"The western exchanges can only grow stronger as the trade now recognizes their contracts as world benchmarks," said a broker dismissive of Simex's attempt to become a center for paper oil trade.

"The longer Simex and other Asian exchanges are not in the picture, the less important they will become," he said.

In China, entire exchanges, not just their contracts, have expired after a brief flowering, while in Japan, energy futures have not moved beyond the drawing board despite years of discussions among industry participants.

The report also quoted some traders from foreign oil companies here as saying that they preferred using the OTC market as Asian exchanges suffered from low liquidity and poor confidence.

"The increased liquidity generated by the OTC trade went mostly to Nymex and IPE, leaving only the crumbs for Simex and other regional exchanges," the report said.