Paper trading based on Russia's Urals oil jumps

LONDON Thu May 22, 2014 8:31am EDT

LONDON May 22 (Reuters) - Trading in derivatives based on Russian Urals oil, one of the world's biggest grades of crude by volume, has more than doubled in recent months as demand has risen and new brokers have entered the market.

The improved liquidity, which has been encouraged by some of the biggest trading houses and oil majors, has long been seen as one of the main preconditions for Urals to become one of the world's crude benchmarks, similar to Brent.

But stable and politically unrestricted oil flows are two other preconditions. Rising tensions in recent months between Russia and the West over the annexation of Ukraine's Crimea and concerns about trade sanctions have, meanwhile, put on hold any plans for Urals to become a benchmark.

"I think Urals will continue to develop. The paper market is becoming more active, and the relevance of Urals will grow," said Neil Standen, managing director and the head of the Swiss office of broker GFI Group.

Trading sources estimated that paper trading in Urals has more than doubled. The total volume is difficult to pin down because transactions are kept anonymous.

Transactions in Urals paper, also known as swaps or contracts for difference (CFDs), allow traders to place bets on the differential between Urals and the Brent benchmark in future months.

With such trades, players aim to hedge volatility risks or simply chase higher profits by taking speculative positions.

COMPETING CURVES

GFI and rival broker Sunrise have launched Urals swaps trading over the past year, challenging the long established dominance in this niche market by PVM brokers, which was acquired by Tullett Prebon this month.

Trading in Brent swaps exceeds the production of physical volumes of Brent oil by several times. In Urals, paper volumes are still small compared with production that exceeds 4 million barrels per day.

Trading sources said the activity in Urals swaps trading is being encouraged and explored by traders at companies such as Eni, Lukoil and Trafigura.

"The existence of products from several brokers makes this whole thing more interesting. You basically have competing time curves," a trader in Urals paper at a major trading desk said.

Standen said that as the market developed, more players could take advantage of swaps to hedge should price volatility increase.

Urals prices have been relatively stable even at the peak of the Ukraine crisis, which according to several traders has had little impact on CFD transactions.

"One would expect Ukraine to have some impact on volatility, but it really hasn't," one trader at an oil major said. "What it really did, though, is that no one is talking anymore about Urals as a benchmark." (editing by Jane Baird)