S'pore launches new futures oil contract

S'pore launches new futures oil contract

SINGAPORE (AFP): The Singapore International Monetary Exchange Ltd. (SIMEX) yesterday launched a new version of Asia's only fuel oil futures contract to provide traders with a better hedge against price volatility.

The unpopular original contract, which made its debut in 1989, had gone untraded for more than a year, prompting SIMEX to resuscitate it in a new format suggested by fuel oil traders, officials said.

In the most important change, SIMEX reduced the sulphur content of the fuel oil -- used mainly by power plants and to run ships -- from four percent to 3.5 percent, bringing it in line with the cargo market's specifications.

Officials said the change would enable futures prices match those traded in the physical markets and facilitate the physical delivery of the contract.

Other changes were an improved set of delivery terms aimed at encouraging liquidation or roll-over of monthly positions before the contract expires. Physical deliveries will be made in cargo- size lots of 100 contracts (10,000 tons) or multiples.

"I think the contract will do much better than the old contract," Jimmy Ang, first vice president of business planning and business development at SIMEX, told AFP.

"The quality specifications are much better and therefore have much wider use and base," he said.

"Delivery terms and procedures are much more improved. They are a lot clearer and gives traders better comfort that they will be able to take or make physical deliveries as and when their exchange position requires them to do so."

Ang said regional traders were expected to wait and see how local traders respond to the contract.

"But certainly if local traders support and grow the contract, it means the region will have a good risk management tool for fuel oil needs," he said.

A futures contract is an agreement to sell a fixed quantity of a particular commodity, currency or security for delivery at a fixed date in the future at a set price.

Tim Bullock, regional trading manager of BP Oil, said the new fuel oil contract would boost risk management within the region and also Singapore's position as an oil trading center.

The fuel oil contract was Asia's first indigenous energy contract. Attempts to introduce energy futures contracts elsewhere in the region have failed because of low market liquidity and weak response.

The region is the world's second biggest consumer of oil with demand amounting to 17.9 million barrels per day in 1995, compared to North America's 20.2 million barrels.

But it has lacked a vibrant oil futures market, depriving it of the opportunity to set or influence global prices.

Much of the oil trading in Asia is still being done in the so- called over-the-counter markets, through banks, broking houses and oil companies, which operate outside the jurisdiction of a recognized exchange and could be a source of credit risk.

Keith Knowles, senior vice president and general manager of Mobil Sales and Supply Corp. (Asia-Pacific), said the contract was a step towards boosting energy futures trading in the region.