Friday, February 19, 2010

SGX To Trade New Fuel Oil Contract - Wake Up Bursa!

With Singapore's status as the world's largest bunkering port and the world's third largest oil trading hub, SGX said the new contract will further enhance the country's attraction as an international oil pricing centre. The contract is based on the Residual Marine Grade 380 ISO 8217, primarily bunker fuel oil supplied to ships. Physical delivery will be through free-on-board or inter-tank transfer at exchange-designated Singapore oil installations. The minimum trading contract size is 100 metric tonnes per lot and the minimum deliverable size will be 2,000 metric tonnes or 20 lots.

Market-makers and liquidity providers will be available for this contract, SGX says.

According to Lam Yi Young, chief executive of the Maritime and Port of Authority of Singapore (MPA), the new contract is expected to attract demand from local and international participants. "SGX's fuel oil futures contract will encourage greater participation in Singapore's marine fuel market both from local and international shipping and bunkering communities," he says.

The Simex contract was for fuel oil with a viscosity of 180 centistokes, widely considered the global benchmark.

However, the two previous offerings failed to take off. The Simex contract was later withdrawn; CME Group still lists its fuel oil contract though volumes have failed to ignite.

So despite Singapore being home to the world’s busiest port in terms of shipping tonnage, what went wrong? Elena Sing, SGX’s head of commodities, says it is simply a matter of timing. She told Futures and Options World inthat market participants had approached the exchange asking for the contract, especially firms that could not access the over-the-counter market.

“The Simex contract was in existence nearly 20 years ago,” Sing says. “Back then there was limited storage space, whereas now Singapore has extensive storage capacity. There are also a far greater number of market participants.”

Sing concludes: “The market is ready for this new futures contract.”

SGX’s optimism is shared by others in Singapore. Chong Lit Cheong, chief executive of International Enterprise Singapore, says: “Singapore has been one of the leading physical commodities trading hubs in Asia Pacific, in particular for the oil trading sector. The launch of SGX’s FO 380 contract will undoubtedly further strengthen our value proposition to the global oil trading community.”

The regional head of commodities at a futures commission merchant in Singapore says: “We’ve had quite a lot of interest from our customers. Those clients are mostly already active in the oil market, rather than the hedge funds.”

However, success for the contract is far from guaranteed, say industry insiders. The 180 centistoke standard, rather than 380, is the global benchmark, and that although Singapore is a hub for oil trading, much of that trading is entrenched in New York, particularly the Platts-linked OTC contract.

The settlement process is extremely complicated. SGX says it will match buyers and sellers by volume, before loadings are fixed. For unmatched volumes, parties will settle their trades against the monthly closing price for the contract.

With firms like Shell, BP and Singapore Petroleum Co, as well as traders Vitol, Glencore, Chemoil, Hin Leong, PetroChina, shipper Maersk and bunker supplier Equatorial Marine all involved in forming the contract, such large players may provide the liquidity so sought after by non-physical players in the oil market.

The contract will have two daily trading sessions: 9am to 7pm and 8pm to 10.55pm. The 7pm closing price will be the price for the day’s settlement. The monthly settlement is the average settlement price for the last five days of the month.

Comments: Despite two false starts, SGX kept at it and by bringing in the major players as "consultants" in setting up the contract, it should have a better chance at success. This brings us back to Bursa, where foreign funds have been staying away for the past 16 months. The palm oil futures USD contract has not yet borne fruit. Could we be in danger of losing the palm oil futures stranglehold soon?

Sometimes, just because something is chugging along does not mean we can do nothing. We need to enlarge the pool of palm oil traders and lure more and more big companies to trade the existing RM or USD contracts. Only by being bigger will the contract stay put. If we do nothing, I am very sure SGX will try to launch a USD palm oil contract in the near future.

After selling 25% of our derivatives unit to CME Group, we have yet to see tangible benefits!!??

Yes, we can sit and say that KL is not a financial center and will face a lot of obstacles. We need to be proactive. We should nurture our niche markets, be it in Islamic finance or palm oil, or even rubber and tin. We do not seem to have a roadmap or a cohesive strategy. We do not seem to have a bigger picture appreciation of the evolving needs and demands on these so called "home advantage" products. As in many things in Malaysia, we do not have a proactive mindset, we have a poor strategic mindset about most things, we have a high propensity to churn out brilliant power points but that is usually not complemented by a similar record in proper execution, and we usually do not spend enough time on details and crossing the T's and inking the dots.

p/s photos: Sandra Dewi

1 comment:

emacro said...

They are sitting in their White Castle (Kubu Puteh) at Kewangan Hill.... contented, satisfied and patting themselves on the back every month.