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.