February 3, 2011 / 11:10 AM / 7 years ago

London wrenches oil trade crown from New York

NEW YORK (Reuters) - London is set to overtake New York as the biggest center of crude and oil product futures trade this year, signaling a shift in power as the capital benefits from soaring demand in Asia and mounting concerns over the usefulness of key U.S. contracts.

The IntercontinentalExchange ICE.L, headquartered in Atlanta but known for its European contracts, has increased its share of the major crude and product futures trade to just shy of 49 percent in 2010, having doubled its volume in five years.

Trade on long-term rival the New York Mercantile Exchange has also expanded thanks to burgeoning interest in commodities from traders and investors alike -- but not as fast. NYMEX volume rose about 17 percent last year; ICE surged 31 percent.

ICE (ICE.N) is now set to claim top spot just 10 years after it bought the old International Petroleum Exchange IPE.L with backing from some of the world’s biggest banks and energy traders, including Goldman Sachs (GS.N) and BP (BP.L)(BP.N).

The shift in power is not completely unexpected: traders have been warning for several years that big investors could move money out of the United States to avoid a tough regulatory crack-down now underway. What’s surprising is that most participants say that’s not the main reason for the shift.

“Rising volume and open interest on Brent is a clear signal from the managed risk segment of the market that it’s becoming ‘the barrel of choice’,” says Michael Guido, director of hedge fund energy sales at Macquarie bank in New York. He expects more clients to favor it in the coming years.

“Its key attractions are its physical peg and a direct link to Asian demand.”

And while ICE has benefited from the well publicized attraction to Brent crude as a better global benchmark than U.S. WTI contract, it has also gained from a huge rise in trade of its gas oil contract used for hedging (and speculating on) distillates such as diesel and jet fuel.

Soaring demand in Asia for industrial fuels helped boost gas oil trade by 45 percent on ICE in 2010 alone. ICE trade of Brent was also up 35 percent while its WTI contract volume rose 13 percent.

David Greely, head of energy research at Goldman Sachs in New York, said the ICE gas oil contract based on delivery into northern Europe gave it a key advantage over NYMEX.

“Gas oil is the most exposed of any oil product future to emerging market growth,” Greely said. “It’s heavily leveraged to what’s happening in China and other emerging economies in Asia, where diesel is in high demand.”

By contrast, NYMEX saw volume on its heating oil contract drop by a fifth last year due to uncertainty around looming changes to the contract’s specification.


Spreadsheet of traded volumes on ICE and NYMEX: r.reuters.com/fuz77r

Graphic on Brent premium to WTI: r.reuters.com/guz77r



The trend continued in January, with ICE average daily volume across Brent, gas oil and WTI up 30 percent from a year ago, while CME said average volume across its energy futures rose 22 percent over the same time period.

Rising volume will bolster the position of those who say North Sea Brent has supplanted U.S. crude, also know as West Texas Intermediate or WTI, as the main global benchmark for pricing oil, with accusations the U.S. benchmark has become disconnected from global trade.

That argument has raged since the start of this year as Brent has traded up to $100 a barrel and beyond while WTI has languished frequently below $90 because of oversupply from new Canadian oil sand fields being sent to the WTI delivery point in Cushing, Oklahoma.

But NYMEX’s parent company, the CME Group (CME.O) -- the world’s largest futures exchange operator -- can still point to far greater liquidity in WTI, even if ICE is on track to take a majority share of combined oil and product futures trade this year.

Between New York and London, over 218 million WTI futures contracts changed hands in 2010, more than double the total volume on Brent.

In a joint letter to the Financial Times on Wednesday, CME Groups’ CEO Craig Donohue and chairman Terry Duffy pointed out additional pipelines linking Cushing to the Gulf of Mexico will be completed by 2013 and the WTI contract has seen a huge volume increase at the start of in 2011, with trade up 48 percent from a year ago.

And NYMEX still enjoys overwhelming superiority in options trading, with 98 percent of all deals executed in New York.

Over 205 million major oil futures contracts traded on ICE last year, up 31 percent from 156 million in 2009.

Almost 50 percent of that total was ICE’s flagship Brent crude, used for pricing oil in many parts of Africa, Asia and the Middle East. Gas oil and WTI trade made up roughly 25 percent each of trade in London, with RBOB and U.S. heating oil less than 1 percent of total ICE volume.


    The United States remains by far the biggest oil consumer in the world, consuming almost a quarter of the more than 88 million barrels used globally each day.

    But the far larger populations of the developing world are rapidly catching up, with countries outside the Organisation for Economic Co-operation and Development OECD.L tipped to be responsible for more than 50 percent of world consumption in the next two to three years.

    “As WTI has dislocated from the rest of the market traders are realizing the world is a bigger place than just the United States,” said one veteran oil trader in London.

    John Kilduff, a hedge fund manager at Again Capital LLC in New York, said growing interest from financial investors has also been a boon for both exchanges, especially as investors become more experienced in commodities and look to trade beyond the WTI contract in New York.

    “There’s much more knowledge about commodities now and ever more investment money getting allocated to commodities that is looking for liquidity,” Kilduff said.

    “The advance of electronic trading has made Brent and gas oil more accessible.”

    For NYMEX, the biggest winner from this trend last year was RBOB gasoline, with volume up 31.8 percent. NYMEX WTI volume was up 22 percent, but CME lost out on U.S. heating oil.

    Joe Raia, managing director of marketing at CME Group, said higher liquidity and a stricter regulatory regime in the United States shows WTI remains on top.

    ”NYMEX is still the dominant benchmark when you look at volume and open interest.

    The ICE Exchange does, however, have more diversity, with more than 77 percent of NYMEX futures trade limited to WTI alone. RBOB gasoline and U.S. heating oil made up 13 and 10 percent of NYMEX volume respectively. Gas oil, with 52.3 million contracts trading last year, makes ICE the dominant product futures exchange already.

    Brent and gas oil trade in New York accounts for less than 0.1 percent of NYMEX volume. By contrast, ICE saw 46 million WTI contracts trade last year.

    Traders on NYMEX said part of the shift was linked to uncertainty around regulation in the United States, with position limits set to be imposed by the Commodity Futures Trading Commission CFTC.L within the next 12 months.

    But Guido at Macquarie said that while regulatory arbitrage remains a small concern for clients it was “tertiary” behind Brent’s exposure to Asia and its link to the physical market.

    Dominick Chirichella, a trader and senior partner at the Energy Management Institute in New York said the shift in volumes mattered more to the exchanges themselves than to traders.

    “They have been battling the volume game for years now and this is just a continuation,” Chirichella said. “I do not think the trader community cares where it trades as long as there is liquidity.”

    Additional reporting by Jeffrey Kerr and Jonathan Spicer in New York; editing by Jonathan Leff and Lisa Shumaker

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