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Singapore Exchange (SGX) has announced that it will start trading its new Fuel Oil 380-cSt futures contract (FO 380 Contract) on 22 February 2010. “The new contract provides our global participants an attractive price discovery and hedging product. This launch is timely and will bolster Singapore’s position as a commodities trading and clearing gateway,” said Magnus Bocker, chief executive officer of SGX.

The new contract is based on IFO 380, with physical delivery via FOB or inter-tank transfer at Exchange-designated Singapore oil installations. The minimum tradable contract size is 100 metric tonnes per lot and the minimum deliverable size is 2,000 metric tonnes or 20 lots. Market markers and liquidity providers will be available for this contract. The trading session for the new contract has been specially extended to allow shipping companies, bunker

suppliers and oil trading companies an efficient and transparent pricing mechanism for the Singapore fuel oil market from Asia open to Europe close. Trading runs from Singapore time 9.30am to 6.30pm followed by 7.30pm to 1.00am. According to Lam Yi Young, chief executive of the Singapore MPA, “SGX’s fuel oil futures contract will encourage greater participation in Singapore’s marine fuel market from both local and international shipping and bunkering communities. This complements Singapore’s position as a top bunkering port and is in line with MPA’s effort to develop a conducive and progressive environment for the bunkering industry.”

While the new contract offers another option for financial hedging, it is the adoption of physical hedging as an instrument for managing risk that will play a key part of risk management strategies in 2010 and beyond. Speaking at Platts Managing Oil and Energy Risk Conference Morten Dehn, general manager, OW Bunker, Risk Management said: “The physical hedging of bunker fuel purchases enables customers to buy products on a forward basis, and is a definitive and easily auditable hedging instrument that provides cost stability. Following the economic downturn, we are now operating in a new era of responsibility, where companies have to exercise an appropriate level of conservatism. They must caution themselves against unnecessary risk taking, even if the appetite for risk returns as the markets begin to recover. Physical hedging provides this stability as part of a comprehensive risk management strategy that incorporates a mix of tools and instruments.”

He argued that physical hedging allows customers to fix and lock in the price of bunker fuel in a specific port where they know they will be purchasing products, while still being able to lift in any port in the world, and maintain the use of the contract.

Mr Dehn also stressed that the key to an effective risk management strategy is ensuring that it is embedded into the infrastructure of an organisation – its corporate and financial processes and the day-to-day operations of the business.

He added: “There has to be a planned and formulaic approach to risk management and the implementation of an holistic strategy that becomes a way of corporate life. There must be a clear understanding of a company’s risk exposure, its appetite for risk as well as its motives for managing risk. And most importantly, any risk management strategy must incorporate a variety of tools, instruments and analytical processes that provide balance and stability against the increasing elements of risk that organisations now face, from basis and time risk, to volume, and especially counterparty risk.”

Added 11 February 2010 in the category: Risk management

Singapore launches bunker derivatives

Bunker hedging to form key part of owners' strategy, says OW

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