Kiss of life for Asia's energy futures
Kiss of life for Asia's energy futures
By P. Parameswaran
SINGAPORE (AFP): Asia is moving closer to having a safety-net against oil-price volatility with the impending revival of the region's sole energy futures contract and plans to introduce more hedging mechanisms, analysts say.
Despite being the second largest petroleum-consuming region, Asia does not set its own prices nor directly influence prices on the world market mainly because it does not have a vibrant oil futures market.
"But developments of late have rekindled hopes of having an active energy futures market in Asia which can act both as a pricing vehicle and as a focal point to develop greater discussion in the world market about Asian energy prices," Tom James, regional manager of Credit Lyonnais Rouse Derivatives told AFP.
The Singapore International Monetary Exchange (SIMEX) decided last week to revive its fuel oil futures contract, which had been on its death bed after a mostly mediocre showing over the past two to three years.
The fuel oil contract, which debuted in 1989, is Asia's first indigenous energy contract. Attempts to introduce energy futures contracts elsewhere in the region have failed because of low liquidity and weak response.
SIMEX has reduced the sulfur content of the fuel oil -- used mainly by power plants and to run ships -- under new and more attractive terms of the contract to be launched next month.
In what is seen as another boost to energy futures trading in Asia, the New York Mercantile Exchange (NYMEX) and London's International Petroleum Exchange (IPE) are also planning to introduce Asia-friendly oil hedging contracts.
Industry officials said NYMEX was considering gas-oil and crude contracts while the IPE is said to be eying a link-up with SIMEX to market its gas-oil contract.
NYMEX officials recently held talks on the proposed contracts with industry players in Singapore, Asia's number one oil trading center.
SIMEX is also looking into launching a gas-oil contract by the end of this year.
"For Asia's oil industry, it could be the year it finally develops its own indigenous futures contracts capable of surviving and becoming international market makers and movers," said Ng Weng Hong, editor of the Strategist Oil Report, an industry journal here.
Ng said that if the exchanges succeeded in developing and marketing their contracts, "that will open up the region's pent- up demand for hedging its fast-growing oil exposure."
According to industry estimates, Asia accounted for 26.2 percent of global oil consumption of 67 million barrels per day in 1995, slightly less than North America's 29.77 percent but well above the 22.4 percent share of Europe.
Much of the oil trading in Asia is still being done in the so- called over-the-counter (OTC) markets, through banks, broking houses and oil companies.
OTC markets operate outside the jurisdiction of a recognized exchange and could be a source of credit risk even though it offers players the convenience and liquidity to move in and out of positions, analysts said.
Oil futures contracts in Asia could work if they offered elements over and above those available in the OTC markets, analysts said.
James of Credit Lyonnais said NYMEX had proposed a Far East crude oil basket index for futures trading and most major oil companies had welcomed it.
"It offers a good opportunity for end users to protect their risk. At the moment, the alternative is to use the swaps market in Dubai Crude which is out of the Middle East or to use the Brent crude futures in SIMEX or IPE in London," he said.
The Dubai swaps market is dominated by one or two large oil companies and traders, industry officials said. The IPE Brent futures has a good relationship with Middle East crudes that come to this region and has a wide following.
"A regional crude oil index would offer a hedging tool more sensitive to Asia Pacific supply-demand factors," James said.