FocusNew Europe jet fuel futures yet to take off

23 May 2012 16:36  [Source: ICIS news]

By Kate Wilcock

LONDON (ICIS)--Low sulphur gasoil futures made their first appearance in the European jet fuel market last week but the contracts are yet to be used in a physical deal, despite increasing interest.

The futures have been introduced by the Intercontinental Exchange (ICE) to meet growing demand for a long-term hedging option and to satisfy European environmental standards in the middle distillate market. They will run parallel with the existing gasoil contract until January 2015.

The new products were launched back in September 2011, but saw their first activity in the jet fuel market last week.

It is anticipated that they will be better aligned to the jet fuel market and be less volatile than the existing gasoil futures.

For the first time buyers can come to a market that has its own liquidity with the closest match to a jet fuel specification. said ICE product development manager Mike Davis.  

BP, the first to offer jet fuel using the new low sulphur contract, failed to find a buyer for a 30,000 tonne cargo offered for three successive days from 14-16 May at a premium of $68-71(€54-56)/tonne CIF (cost, insurance and freight) Rotterdam before reverting to the existing gasoil futures.

Trader Morgan Stanley placed more than 13 bids between 15-23 May using the low sulphur gasoil futures contract, both on the barge and cargo markets.

June low sulphur gasoil futures were bid and offered at $917.75-921.25/tonne on Wednesday afternoon, however the market is still in its infancy.

Davis said interest in the new low sulphur futures contract is going as expected.

“While it was launched on 16 September 2011, the first contract month was January 2012, so you will not get much interest in the first three to four months.”

The decision to run two gasoil contracts parallel has drawn criticism from some market participants who see it as counter-productive in achieving a liquid market.

“With a contract as successful as high sulphur [ICE gasoil] you have many years forward of over-the-counter (OTC) written against the existing specification. You cannot easily convert values from one into another,” he said.

Market sources said as there are not many people trading low sulphur gasoil in the physical market, businesses are not inclined to move across.

However, one source said as the European summer approaches there may be more demand for low sulphur gasoil and less for high sulphur gasoil, which could see buyers trying to hedge against low sulphur futures as they see it increasing in value.

“We are beginning to see some physical indications against it; I understand some swaps interest is being expressed against low sulphur,” Davis said.

The contract is based on a 0.001% sulphur (10ppm) diesel barge specification and is available through to December 2016.

The existing ICE gasoil futures contract will continue to trade as per its current 0.1% sulphur (1,000ppm) specification parallel with the new specification, up to and including January 2015.

The ICE has changed its gasoil specifications twice in the past to meet environmental changes and consumer requirements.

($1 = €0.79)

By: Kate Wilcock
+44 208 652 3214

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