Singapore launches Brent crude futures

Singapore launches Brent crude futures

SINGAPORE (AFP): The London-developed Brent crude futures contract debuted here yesterday as Asia's first major crude oil instrument amid confidence by officials that the region will accept it as a hedging mechanism against price risks.

"For every two barrels of oil used in the world over the next 10 years, one barrel will be consumed in Asia and we feel that this is important for Brent," said Leonard Schuman, marketing director for International Petroleum Exchange of London Ltd. (IPE)

Brent is the predominant international benchmark crude, against which 65 percent of the world's crude oils are priced, including many which come into Asia from the Middle East and West Africa.

Brent futures began trading on the Singapore International Monetary Exchange (Simex) at 07:00 GMT under a mutual offset system (MOS) with the IPE, the first such arrangement by the London body with an overseas exchange, officials said.

The system allows Brent to trade continuously for 18 hours, stretching from the opening of Asia through to the close of the trading day in the United States, they said.

It will allow users of the contract to open a position on one exchange and liquidate that position on another.

Schuman said he was confident that Asian state-owned oil firms would support the contract despite market perception that the region was still cautious about oil futures trading.

"Despite some of the commentary we see coming out in the region, all the major state-owned oil companies we have visited have shown some degree of interest. I am very optimistic," he told reporters.

Blame

Traders often blame tight regulations and guaranteed margins in most Asian countries for the failure of exchange-based trading and a predominantly conservative approach for the lack of interest in hedging.

Japanese companies have kept away from paper Brent trading after incurring large losses at the New York Mercantile Exchange in the late 1980s, while the South Koreans are generally seen to be apprehensive about hedging.

The IPE, which launched its Brent contract in 1988, was also looking at other energy contracts, like gas oil, in the tie-up with Simex, Schuman said.

Officials believe Simex's daily volume in the first year range from 500 to 2,000 contracts per day, sufficient to provide a base of start-up business.

"There is a need in Asia for a reliable and transparent benchmark due to the historical and continuous price volatility of oil. Brent in the natural choice," Ang Swee Tian, Simex President said.

IPE's Brent enjoys a much wider following than Simex's past contracts, including its sole surviving fuel oil contract.

Simex hopes to use Brent as a launching pad to the world oil futures market after being hit by delistings of the Dubai crude contract in 1992 and gas oil a year later. Its high-sulfur fuel oil contract is also running out of steam.

"We may consider relisting gas oil futures if the industry is willing to support it," a Simex official said.