Singapore to launch Brent crude futures contract

Singapore to launch Brent crude futures contract

SINGAPORE (AFP): Singapore is set to launch the London-
developed Brent crude futures contract this week, offering Asia's
rapidly-growing oil market a hedging mechanism against price
risks, officials said.

But many dealers and analysts said the contract would not be
an instant hit in Asia's oil community because the region's
caution about oil futures trading.

"I don't think it will be roaring success because, excluding
Japan and South Korea, the region is filled with state-owned oil
companies which have still not come to grips with dabbling in
futures," Kho Hui Meng, manager for crudes with the Swiss firm
Vitol Asia Pte. Ltd., told AFP.

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.

Kho said, however, that the mood could see a gradual shift
over the next few years as awareness of risk-management
increases, adding that Singapore trading of the Brent contract
would be largely western-based.

"I don't think most Japanese companies allow oil trading on a
speculation basis. Even if they do, I think they will prefer to
do it during London or New York time," said Naoki Fujishiro,
trading manager with Marubeni International Petroleum (S) Pte.
Ltd.

The Singapore International Monetary Exchange (Simex) will
begin trading on Brent crude futures Friday following an
agreement reached in February with the International Petroleum
Exchange of London Ltd. (IPE).

The pact to trade the IPE's high-flying contract by a mutual
offset system (MOS) is the first such arrangement by the London
body with an overseas exchange, Simex officials said.

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.

Arrangement

The MOS arrangement will effectively extend the trading hours
of the Brent crude contract from the Simex open to the IPE close.
It will allow the users of the contract to open a position on one
exchange and liquidate that position on the other exchange.

Trading in the contract in Singapore will be from 02:31 GMT to
10:00 GMT, when IPE opens, extending trading hours from 11 hours
a day to 18 hours.

"Our ongoing goal is to develop Simex Brent contract into a
credible and useful market, enhancing Simex's position as an
important energy market in Asia," Simex President Ang Swee Tian
told the Singapore Oil Report, a local oil journal.

Ang said in the journal's latest issue that as demand for oil
grew in Asia, so will the need for oil risk management. "There is
a need for a reliable and transparent benchmark due to the
historical and continuous price volatility of oil."

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

Kho predicted that Simex would take a "small piece of the IPE
pie" because it enjoyed a one-hour headstart in trading.

"Now we can take up more aggressive positions from Singapore
without waiting for directions from London," said Tetsuro Toyoda,
crude and product trading manager for the French firm Total
Petroleum Southeast Asia Pte. Ltd.

Market makers should also quote more tight numbers for other
oil contracts if they knew they could quickly hedge them against
Brent, Toyoda said.

"Growing Asia is buying more West African crude which is based
on the Brent market, so Simex will provide an opportunity for
hedging," he said.