By Yaw Yan Chong
SINGAPORE, April 29 (Reuters) - Singapore Exchange's proposed fuel oil futures could see warmer reception from sellers, who see it is another way to offload cargoes, than buyers averse to paying security deposits and to its loading limits, traders said on Wednesday.
SGX <SGXL.SI>, which is developing a fuel oil contract similar to that operated by SIMEX in the early 1990s, held a session on Tuesday with majors Shell, BP and Singapore Petroleum Co, as well as traders Vitol, Glencore, Chemoil, Hin Leong, PetroChina, shipper Maersk and bunker supplier Equatorial Marine.
From a sellers' perspective, the contract for the 380-centistoke fuel oil grade offers another outlet with lower counterparty risk, as they are trading with the exchange.
"At the beginning, it would have no pricing impact and cargoes are traded on the exchange either to cover actual demand-supply, or for traders to punt on the market," a Singapore-based Western trader said.
Natural sellers are trading houses and oil majors, who sell fuel oil as ex-wharf marine fuels to barge operators and shipowners.
"The natural sellers either produce the oil or import it. They only buy in Singapore if they are short or have pricing interests," another trader said.
But some traders said the futures contract would not be a benchmark at the outset and that limits its attraction.
"For pricing interests, the Platts window is still very entrenched," the trader added.
"Until the SGX contract becomes a benchmark, it will be hard to do any swaps settlement off the contract. They will have to drum up liquidity before that can happen."
To succeed, the contract needs liquidity as it progresses, said another trader. "This is at least the seventh regional attempt at a futures contract for fuel oil."
BUYERS AVERSE
The SGX contract is based on 100 tonnes per lot and will be traded on a free-on-board (FOB) basis, which means the cargoes can be loaded from any shore-based terminal in the city-state.
SGX has proposed two daily trading sessions -- 9:00 am-7:00 pm and 8:00 pm-10:55 pm, with the 7:00 pm closing price as the day's settlement. The monthly settlement is the average settlement price for the last five days of the month.
In an exchange environment, participants have to put up security deposits for their trades and top up when margin calls are made, if the market moves against them.
At the end of the contract month, the exchange will match buyers and sellers by volume, before loadings are fixed. For unmatched volumes, the parties would settle their trades against the monthly closing price for the contract.
As such, bunker suppliers and shipowners -- the buyers -- who typically receive 30-day credit, would have to invest upfront capital. They also face the risk of not receiving the goods.
"There's less incentive for a bunker supplier to participate. Also, there's no guarantee of receiving the cargoes, so it's a punt and most of us can't afford it," a bunker supplier said.
Most bunker suppliers in Singapore, the world's largest bunkering port by volume, are mid-sized firms with tight cashflows.
The New York Mercantile Exchange (NYMEX) started a similar futures contract in Singapore about three years ago, but it suffered from poor liquidity and has not seen a single trade.
"The contract is presently inactive. But I still think it's a good contract and we will be looking to revive it sometime in the future," said George Ng, the CME Group's Asia Head of Energy and Metals Products.
SGX also operates a clearing house, AsiaClear, for the Asian oil swaps market for several products including fuel oil. Its volumes are lower than that of NYMEX's Clearport and the International Clearing Exchange's ICE Clear.
