MARKETS | JULY 4, 2011, 2:30 P.M. ET
ICE Heats Up Oil Rivalry
By DAN STRUMPF
NEW YORK—Since practically inventing the oil futures contract in 1983, the New York Mercantile Exchange has ruled that market. But after decades of dominance, its main rival is posing a serious threat.
IntercontinentalExchange Inc.'s Brent futures traded more heavily than the Nymex's flagship light, sweet crude futures in four consecutive trading sessions in late June, a record. ICE volume in overall oil futures trading, including its lookalike to the Nymex contract, also was higher in June, the first month ICE won the volume crown in four years.
If the trend continues, ICE could threaten trading and clearing fees that are a large source of revenue for CME Group Inc., which bought Nymex in 2008 in part for its dominance in the oil market. It also is another sign of America's waning role in setting global oil prices, as more and more traders view North Sea Brent crude as a better pricing benchmark than the Nymex's Cushing, Okla., contract. In the past three months, Nymex benchmark futures volume fell 15% from a year earlier, compared with a 26% rise for ICE's Brent.
"Brent is winning the popularity contest," said Tim Evans, energy analyst with Citi Futures Perspective.
Several big oil producers, airlines and refineries, which use the futures market to protect against price volatility, switched to Brent this year. They view Nymex futures as trading at an artificially low price, owing to a glut of oil in Cushing. Brent has had supply problems, including North Sea production outages.
On Friday afternoon, August Nymex prices fell 0.5% to $94.94 a barrel, while August Brent shed 0.6% to $111.77. Historically, the Brent and Nymex contract rarely traded more than a couple of dollars apart.
There also is more evidence that investors speculating on oil prices are moving into Brent. Brent's four-day win streak came after the International Energy Agency's unexpected June 23 announcement that its members would release 60 million barrels of oil and fuel from strategic reserves.
It was the Nymex that recorded a volume boost during another recent supply surprise. On Feb. 22, as violence in Libya began to threaten oil production, the Nymex contract's volume exceeded Brent by more than 750,000 trades. On June 23, Brent's volume was 229,532 contracts higher.
"What we're seeing now is people reloading the market that they want to be involved in," said a trader with one large investment bank. "The smart money, the people who understand oil, are going to trade Brent over this situation."
Both exchanges profit from volume by collecting trading and clearing fees. In May, ICE said its first-quarter revenue from Brent futures and options trading rose 29% from a year earlier, to $48.6 million. Analysts at Evercore Partners on Wednesday upgraded their second-quarter earnings estimate for ICE, citing Brent's volume growth.
CME doesn't break out revenue from oil trading, a spokesman said.
CME still has a wide lead over ICE by some measures, including oil options trading. The Nymex also has more outstanding futures contracts, known as open interest. On Thursday, Nymex futures open interest stood at about 1.5 million, nearly double Brent's total.
"Open interest is the measure of participation in the market," said Bob Levin, managing director of product development at CME. "If you don't have open interest, you don't have a successful product."
Brent's rising volume, but not open interest, suggests a jump in short-term trades by speculators.
"A lot of people are having a lot of fun and making a lot of money by pointing and clicking rapidly" in the Brent market, said Mr. Evans of Citi Futures Perspective. IntercontinentalExchange declined to comment.
online.wsj.com |
