IPE EXPANDS TRADING, PLANS DISTILLATE CONTRACT

Jan. 22, 1990
Peter Wildblood International Petroleum Exchange London London's International Petroleum Exchange has experienced a remarkable growth period over the last 3 years. During this time both turnover and open interest have increased tenfold with a growth rate over the last calendar year of 130%. These developments reflect the acceptance by the oil industry of futures as a valuable hedging and pricing vehicle, and the validity of the exchanges' contracts to fulfill this need.
Peter Wildblood
International Petroleum Exchange
London

London's International Petroleum Exchange has experienced a remarkable growth period over the last 3 years. During this time both turnover and open interest have increased tenfold with a growth rate over the last calendar year of 130%.

These developments reflect the acceptance by the oil industry of futures as a valuable hedging and pricing vehicle, and the validity of the exchanges' contracts to fulfill this need.

The IPE currently provides futures contracts for Brent crude oil, gas oil, and heavy fuel oil. It has also introduced U.S. style trade options contracts on the underlying futures contracts for crude and gas oil. This package is part of the Exchange's plans to provide the industry with coverage of the whole barrel.

CASH SETTLEMENT

The past year has seen IPE's Brent crude oil contract, based uniquely on cash settlement, established as a viable trading and hedging vehicle.

After considerable discussions with the industry, the Exchange decided to introduce cash settlement for crude oil because, even beyond the constraints of delivering small parcels at Sullum Voe, cash settlement provided certain advantages.

First, it overcomes the risk of a physical delivery squeeze and avoids the possibility of the futures price being distorted for purely futures markets reasons. Indeed, by definition, cash settlement must reflect the price situation in the underlying physical market and consequently offers a more consistent and reliable hedging relationship against that underlying physical market.

Secondly, cash settlement has the further advantage that all participants are on an equal footing, whether buyer or seller, trader or investor.

Significantly, the volume of contracts going through to cash settlement is five times that normally experienced on futures contracts providing settlement by physical delivery.

That evidence tends to support the view that users have confidence in the IPE's cash settlement mechanism.

EFPs have played a major role in the way the industry hedges and fixes prices, both for crude oil and for products. EFPs now represent about 90% of deliveries.

This truly flexible facility is being used to make or take delivery on a one-to-one basis in a location and quality suitable to both parties' requirements.

CHANGES AHEAD

The Exchange anticipates that this pattern of growth will be maintained, and in 1990, expects to introduce a light distillate contract to complete the coverage of the barrel.

This will increase the risk management capability of users and encourage spread trading between crude and products.

Following requests from the users of the market, the Exchange decided to extend its trading hours until 2000 hours (London time) to meet the needs of the European physical market, particularly for crude.

This will also increase the trading opportunities for industry users in the U.S.

The Exchange's application to the CFTC to lift its ban on foreign options has now been approved and from Jan. 5, 1990, U.S. customers will be able to trade the IPE's traded options contracts for Brent crude and gas oil.

The former is expected to be particularly useful with its strike prices set at 50% intervals.

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