New Sour Crude Futures Contract Traded for First Time

Posted by Charlotte LoBuono on December 10, 2009 at 11:37 am

Argus’s information sheet on its new sour crude contract. (image: argusmedia.com)

Dow Jones reported CME Group’s sour crude futures contract that was announced in late October saw its first trade on Tuesday. The transaction was for 50 contracts for April 2010 delivery on the New York Mercantile Exchange (NYMEX).  CME group, owner of the NYMEX, created the contract to allow for crude oil trades based on the new sour crude index from the price reporting firm Argus. It was conducted as a “spread” to West Texas Intermediate (WTI), with sour futures at a $1.50 discount, Dan Brusstar, director of energy research at CME, said in an online seminar about the new contract.

The trade marks the latest development in Saudi Arabia’s move to price its crude oil sold in the U.S. according to Argus’ Sour Crude Index (ASCI), rather than WTI. Adoption of the ASCI by the Saudis has some market participants believing that it may eventually become a new worldwide benchmark.

That process is expected to be slow, however, because many traders are wary of playing in a market with little or no liquidity. Such caution explains why the new ASCI contract on the NYMEX and the two new sour crude contracts on London’s Intercontinental Exchange (ICE) saw no activity on their first day of availability.

Although it remains unclear what the use of the ACSI as a benchmark will mean for oil prices, it could be the start of an important shift in the pricing of oil. And for heating oil and other energy consumers, this could be a very good thing.

Saudi Arabia decided to use the ASCI due to increasing disillusionment with the WTI after the benchmarks price became “separated from the global oil market this year.” In addition, Kuwait said on November 24 that it, too, may switch from the WTI to the ASCI for pricing its oil. Kuwait’s motivation to make the switch would be similar to that of Saudi Arabia: the WTI is believed to be enduring volatile fluctuations due to rampant speculation, and so it does not represent the true market landscape.

The Saudis and Kuwaitis are among the world’s biggest oil producers. Without them using the WTI contract, interest on NYMEX could decrease overall, leading to less trading activity, less speculation, and therefore, less volatility. Market stability facilitates more accurate prediction of market activity. A more stable market would possibly mean lower heating oil and other energy prices.