Oil, oil and yet more oil. It seems to be the magic word these days. Rising prices and collapsing markets - speculators' over-reaction or a fundamental change? But what are we talking about?
Crude oil comes in various forms: Brent out of the North Sea, West Texas Intermediate (WTI) from the US, Sweet Bonny from Nigeria, Maya oil from Mexico, and the crudes found in the Middle East - all have their own features.
Now these are specific types of crude oil, but what about palm-oil or second generation bio-energy (which are made from crudes)? What are they used for? You could think of almost anything from asphalt to plastics, from heating oil to fuel oil, from diesel fuel to gasoline.
All of these different kinds and types can be traded. Physically or through financial instruments such as futures, options, exchange traded funds (ETF's), warrants, etc. Many different products are listed by several exchanges worldwide. All products have their own specifications and, therefore, their own implications.
The Dubai Gold and Commodities Exchange (DGCX) will launch Fuel Oil futures contracts on October 30, 2006. It will be the Fujairah 380 CST high-sulphur contract. Oil found in the Middle East contains more sulphur than Brent oil or WTI. Combined with different measures of syrupy (API degree) Brent and WTI are called light sweet crudes. Maya is an example of heavy sour oil.
The product specifications are finalized after extensive consultation with key representatives in the oil industry. The Fujairah 380 CST high-sulphur fuel futures contract will commence trading on DGCX with six consecutive forward month contracts, starting December 2006 as the nearest month contract. The contract size will be 100 metric tones of 4.5 percent sulphur, 380 centistoke fuel oil.
You might ask why this kind of contract in Dubai. Fujairah is a main port for bunkering fuel; it is the second largest bunkering facility in the world. Bunkering accounts for 80% of the total consumption of fuel oil in the UAE.
This trading prospect is a huge opportunity for those who love to trade correlated products. Because of my background as a market maker and trader, I absolutely love it!
The price of fuel oil, like heating oil and gasoline for instance, is derived from crude oil; therefore all prices are correlated with each other. Mathematical calculations result in (long term) correlation factors which can be used to trade spreads.
And things will become even more interesting when derivatives like options come into place as the prices of options are greatly determined and highly influenced by the price volatility of the underlying value.
Crude or not, I can't wait!