ICE Middle East Sour Crude Oil

ICE conducts its energy futures, including its oil benchmark contracts mentioned above, through its London-based futures exchange, ICE Futures Europe.

ICE introduced this contract in order to compete with the Dubai Mercantile Exchange, which facilitates trading in Oman Crude Oil Futures Contracts.

The ICE Middle East sour crude futures contract is cash-settled against the Platts Dubai physical cash price assessment, which is the leading benchmark for sour crude in the over-the-counter markets.

The ICE Middle East sour crude contract has brought together for the first time an existing benchmark for the sour grade of crude next to Brent and WTI. This enables market participants to trade spreads between Brent, WTI and the Middle East sour crude futures contract, and therefore to benefit from cross margining.

Companies are able to trade these contracts as a hedge against adverse movements in oil prices. Crude oil futures are extremely popular among big financial institutions and retail traders alike, which can use the possibility to take a side of the market.

Middle East sour crude is the type of oil produced in countries such as Saudi Arabia, Kuwait, Iran and Iraq. This region contains approximately 60% of the world's proven oil reserves. The distinctive feature of this crude oil is that it is high in sulphur.

As a result, Middle East sour crude is difficult to refine into various distillate products, especially unleaded gasoline.

It is important to consider that not all crude oils in the world are equal. European oil is different to American oil, which is different again to Middle East oil. Oil has different compositions and properties depending on their place of origin.

The term 'sweet' in light sweet crude (WTI) refers to a class of crude oil with a low sulphur content, usually less than 0.5%. In contrast, Middle East sour crude oil contains a higher quantity of sulphur. Sweet crude can be refined more easily into higher end products such as gasoline, as opposed to heating oil for example.

Sour crude on the other hand requires more refining to meet current environmental standards, which leads to a higher cost price. Another distinction in oil is 'light' and 'heavy', which refers to the density and viscosity of the crude oil.

The differences in oil types affects the cracking process. This refers to a chemical process that breaks down a large molecule into smaller ones, of which the oil distillation process is an example. In one of my next columns I will deal with cracking and the crack spread (trades) which roughly estimates the difference (or spread) between the end refinery products and crude oil.