Ice plans diesel contract launch in January – Update

Market: Biofuels, Crude oil, Freight, LPG, Natural gas, Oil products
19/07/11

Update adds traders' comments in pars 7 and 8.

London, 19 July (Argus) — Ice plans to introduce a diesel futures contract from January 2012. The intention is that it will replace the current heating oil specification in January 2014.

The exchange is in the second phase of consulting the industry on the move and formally proposed the change on 15 July.

The current 0.1pc sulphur heating oil contract will run in parallel with the proposed new diesel contract until December 2013, when it will be retired, according to the proposal.

The exchange says that diesel markets are the most liquid and representative grade for European middle distillates.

Ice gasoil futures are used to hedge physical sales of heating oil, jet fuel, diesel and some grades of biodiesel.

The futures contract has successfully built up traded volumes. In June this year, some 5.3mn contracts were traded, against 4.5mn a year before and 900,000 in 2005. The concern is over the liquidity of the underlying physical market.

The impetus for the diesel contract came from the market, said traders. They said that a diesel futures contract will be more reflective of actual trading activity on the northwest European market and an easier means of hedging diesel than the current gasoil contract.

The switch is also relevant to the Mediterranean market that is increasingly moving towards low-sulphur as refiners upgrade to 10ppm diesel production. In January this year, Turkey switched to 10ppm from 0.1pc, adding to demand for diesel.

The Ice proposal mirrors thinking at the CME exchange in the US, which said in January that it was considering replacing heating oil futures with an ultra-low sulphur diesel contract in response to northeast US states staggering a switch to 15ppm sulphur heating oil from the current 2,000ppm grade.

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