With the launch of Singapore Exchange’s Fuel Oil Futures just days away, market participants have told Futures and Options World that the Asian bourse could succeed where two others have tried and failed.
SGX unveiled plans to offer Fuel Oil 380 Centistokes futures in December 2009, and confirmed last week that it would list the new product on February 22.
The contract will be physically delivered, at 100 tonnes per lot.
The plans echo previous contracts offered by the now extinct Singapore International Monetary Exchange, predecessor of SGX, and the New York Mercantile Exchange, now part of CME Group.
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 The Simex contract was later withdrawn; CME Group still lists its fuel oil contract though volumes have failed to ignite.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 head of futures at another FCM says 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 head of commodities, however, says there may be a more fundamental problem than an international competitor. “The settlement process is extremely complicated,” he says.
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.
Despite these concerns, market participants are wishing SGX well. Even one of the critics says: “If there’s liquidity, I’m sure we would become involved.”
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.
Colin Packham cpackham@fow.com