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Asia's fuel oil futures seen close to collapse

SINGAPORE: Asia's fuel oil futures contract is close to collapse and traders fear interest will not be revived despite efforts by the Singapore International Monetary Exchange (SIMEX) for a revamp.

Uncertainties over the changes, and when they will take place, are scaring off market participants who do not want to have outstanding positions when the alterations are announced, industry sources said on Tuesday.

The contract, launched in 1989, was not traded for the whole of last week, and only 10 lots were traded on Monday.

Open interest -- outstanding positions -- for September is limited to 36 lots half way through the contract month while there have been no trades for October.

Traded volume has steadily declined over the first half of this year, reaching a low of 1,469 contracts in June, from 4,549 in January. Volume in the first half of 1995 was 18,987 contracts compared with a hefty 109,755 for same period in 1994.

SIMEX officials are in the process of submitting proposed changes to top management before seeking approval from an industry-based energy committee and the Monetary Authority of Singapore.

The proposals were gathered from a meeting held on July 31 between SIMEX energy officials and players active in fuel oil trading. The contract's revamp could take two months.

Many traders said they want the contract revived.

"The fuel oil futures market is still the best place to hedge positions as it is a secure and regulated market and provides transparency," an oil company trader said.

But most are waiting for others to make the first move to give the futures its much needed liquidity.

"The major oil companies will have to take the initiative," said a trader with a Japanese trading house. "But the danger is that the contract might die even before the changes are made...the changes are being moved too slowly."

Other traders prefer to hedge their risks in the forward market which has better liquidity.

An Asian trader said that SIMEX's proposed changes will be limited to the grade and quality specifications as well as delivery procedures. This paints a "very pathetic picture" on efforts to revive the contract, he added.

The trader would like to see more fundamental changes made to the contract rules and regulations. One possibility is to allow a waiver on the requirement for oil trading firms to post a 20 percent bond or trading margin in order to trade the futures.

Major oil firms are exempted from posting this margin.

Traders attributed the illiquidity in the fuel oil futures to a lack of a free market in Asia compared with the west, with oil companies here either too conservative or having no authorisation to trade in futures.

Many cargoes are being brought here from the Middle East, while regional demand is healthy, but trading is in the hands of a few big players. This has led to slackening interest in forward trades as well.

Daily trading volumes on the paper market have dipped to 20,000-30,000 tonnes compared with 60,000-70,000 tonnes about a month ago, sources said.-Reuter