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.