Credit worries slow OTC oil trading

By Jane Merriman and Alex Lawler - Analysis

LONDON (Reuters) - Credit market strains have sliced the volume of over-the-counter trading in oil markets, made traders more careful about who they do business with and some deals harder to finance.

Analysts said this stems from the worst financial crisis since the 1930s, which has toppled Wall St firms and contributed to a near 10-percent slide in crude oil prices on Monday and a partial recovery on Tuesday.

They said credit worries were also spurring a shift to clear over-the-counter oil trades, such as price swaps, on NYMEX Clearport, which offers clearing for some OTC derivatives.

"It's driving a lot of people toward doing cleared OTC business, we've seen that to quite a degree," said Christopher Bellew, a broker at Bache Commodities Limited.

Volumes through Clearport have risen 35 percent since the start of 2008 and in the third quarter were 41 percent higher than the same quarter a year ago, according to Clearport data.

Oil trading ranges from actual cargoes of 600,000 barrels or more to various layers of derivatives used to hedge price volatility, manage risk or simply take a punt on the market.

Some are futures contracts traded on exchanges such as the New York Mercantile Exchange and the ICE Futures exchange, while others are over-the-counter -- a deal directly between parties.

Clearing offered by NYMEX Clearport effectively turns an OTC contract into a futures contract, with margin payments required every day that alleviate the risk of default.

"People are worried about counterparty risk, so if you don't clear your OTC deal you are simply relying on your counterparty to perform," said Bellew.

"In these troubled times, that's not a given."

MORE CAUTIOUS

The OTC markets in oil have not seized up because of credit issues, but liquidity is lower and participants are treading more carefully.

Platts, a unit of the McGraw-Hill Cos (MHP.N) and which provides price assessments in physical oil markets, says derivatives trading, but not physical deals, is slowing down.

"The number of trades and the length of a trading chain are likely to be reduced because of the problems banks are having," said Jorge Montepeque, Platts global director of market reports.

"But the physical oil markets are carrying on because oil has to be moved from producers to consumers.