Asia’s rising economic fortunes have been greatly lubricated by the flow of thick, sticky crude oil. In December 2012, China imported an average of 6.12 million barrels per day (bpd), overtaking the US as the world’s biggest importer of crude, according to the US Energy Information Administration. Now, the continent’s insatiable demand for crude oil and its resulting products is helping to foster an increase in the volume of derivatives trading activity in the region – with local refiners getting more heavily involved in contracts referencing crude oil, naphtha and gasoline, in particular.
“There is genuine growth in the [Asian] market. We are seeing new refining capacity, new markets grow, and more interest in using the east as a source and destination for products [and crude oil],” says Jonathan Pegler, Singapore-based head of trading for the Asia-Pacific region at Trafigura, a Geneva-based commodity trading firm. “You just see constant growth on the supply and demand side of oil and products in the marketplace,” he adds.
Refiners are the largest players in the market – and consequently, it’s an uptick in activity among these players thcrack sat is largely responsible for the growth, say traders. London-based market information firm GlobalData predicts the Asia-Pacific region will account for 40% of the total additions made to global refining capacity between 2012 and 2017. That compares with a combined total of just 23% for Europe and the Americas, according to the firm.
“In terms of the biggest [hedgers], obviously we have to look at refiners. It’s hard to put an exact figure on it, but a few million barrels a month is not unreasonable for them, if the market conditions are right for them to lock in their margins,” says Chee Hong Foo, head of oil marketing for Asia-Pacific at the Singapore branch of GDF Suez Trading, the trading arm of Paris-based GDF Suez.
Market conditions have been favourable recently, with widening crack spreads causing refiners to become increasingly keen to hedge in higher volumes and at longer maturities. Crack spreads consist of the difference between the price of crude oil and the price of refined products and essentially reflect the revenues refiners can expect to earn from the cracking process. In light of the favourable climate, market participants say some Asian refiners are locking in their margins up to three years ahead – more than double the industry norm of 12 to 18 months. This increased willingness to trade has been most pronounced in over-the-counter derivatives referencing gasoline and naphtha, while the Dubai Mercantile Exchange (DME) has also seen increased volumes in its Oman crude oil futures contract.
There is genuine growth in the [Asian] market. We are seeing new refining capacity and new markets grow
Largely owing to the activity of refiners, trading houses say gasoline is currently one of the most attractive areas in Asian oil and products trading. According to Trafigura’s Pegler, OTC swaps linked to New York-based price reporting agency Platts’s prices for Singapore 92 Ron unleaded gasoline have increasingly become the tool of choice for hedgers and traders during the past year. “That has become a standout benchmark in the east. Even going back a year ago, the [OTC Singapore 92 Ron unleaded gasoline] contract was not hugely traded, but it has now become a standard benchmark, is actively traded and has good liquidity,” he says.
Between June 22, 2012, and March 6 this year, the price of Singapore 92 Ron unleaded gasoline published by Platts rose by 30.6%, reaching $110.43 per barrel (/bbl) at the market close on March 6. Over the same period, the price of Brent crude oil for delivery in Singapore rose by a slightly lower 23.2%, hitting $110.43/bbl at the close on March 6. Gasoline crack spreads hit a peak at the end of February, but they remain favourable, encouraging refiners to lock in their margins as quickly as they can, say traders (see figure 1).
Since naphtha is a blending component used to make gasoline, the increase in gasoline hedging is helping to propel a similar boost in the product. As with gasoline, OTC derivatives are the main beneficiaries of the rise – in this case, the bulk of trading activity is in contracts linked to the Mean of Platts Japan (MOPJ) index.
“MOPJ has grown and become a global benchmark. We have always had an active MOPJ market on naphtha, but in the past six months, the volume has increased and it’s become the focus of trade internationally,” says Pegler.
Sweet to sour
Crude oil trading by Asian refiners is also on the rise, amid a change in the trading preferences of many local market participants. While sweet Brent North Sea crude oil is still heavily used as a benchmark in Asia, many local firms are shifting to using derivatives based on the prices of sour crude grades from the Middle East.
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