The Asia Pacific Exchange (APEX) officially launched its 380cst Fuel Oil Futures Contract (Contract Code: FO) for trading on 11th April 2019, 9pm Singapore time at the world’s largest bunkering port.

The news of the launch was welcomed by industrial participants.

“Singapore is the world's largest refuelling and trading port for bunker fuel oil, with numerous market participants,” said Unni Einemo, Executive Director of International Bunker Industry Association (IBIA).

“APEX's new fuel oil futures contract is expected to form a new pricing benchmark for fuel oil trades, playing an active role in providing market price discovery and arbitraging opportunities for participants.”

Tony Lin, Executive Director & Head of Crude Oil and Fuel Oil of Zenrock Commodities Trading Pte. Ltd. provided his insights: “APEX's Fuel Oil Futures Contract has long trading hours, providing a continuous trading window for the market. The physical delivery mechanism guarantees the convergence of spot-futures prices, enhancing fuel oil’s hedging and arbitrage opportunities.”

“As a trading company based in Asia, with fast growing global reach, Zenrock International is conducting research on the new opportunities that the new product can bring. We believe that the development of the APEX Fuel Oil Contract will bring great benefits to the spot trade and investment opportunities in the fuel oil industry.”

APEX shared the below following information with Manifold Times regarding the launch of its 380cst Fuel Oil Futures Contract:

IMO 2020
The global maritime industry is facing a major challenge, with the upcoming IMO 2020 Rule bringing uncertainty in the market. The uncertainty over fuel oil demand may possibility cause large movements in fuel oil prices. The IMO 2020 Rule states that from 1st January 2020, no vessel can burn marine fuel with sulphur content higher than 0.50% unless it is operating with an exhaust gas cleaning system (scrubber). Currently, there are no clear picture of how the demand for both High Sulphur Fuel Oil (HSFO) and Low Sulphur Fuel Oil (LSFO) will change by 2020. Possible large shifts in demand for both fuel oils may cause prices to swing widely, further justifying the need for price hedging tools in the market.

Despite many industrial participants presenting Marine gasoil as a possible alternative to HSFO, the significantly costlier alternative may be an obstacle for smaller participants to make the switch. Many of the participants will continue to use HSFO – 380cst Fuel Oil as the economical option, and will continue to utilize HSFO contracts as a hedging tool.

Market Situation
Singapore is currently the world’s largest bunkering port in the world, supplying over 50 million metric tons of marine fuel oil annually. As the maritime industry contributes 7% to Singapore’s Gross Domestic Product (GDP), the new regulations are expected to have a huge impact on Singapore’s maritime industry and economy. Singapore contributes up to a quarter of world’s total fuel oil usage, serving as Asia’s pricing centre for fuel oil. As fuel costs remain the biggest cost item for shipping companies, huge price fluctuations in fuel oil prices in recent years can adversely affect operational costs for many companies, which may cause a ripple effect on the Singapore economy.

The largely volatile fuel oil prices have fluctuated up to 100%, urging associated industries to hedge the risk of adverse price movements. Currently, there are limited hedging tools in the local market for fuel oil, with most local participants relying on Over-The-Counter (OTC) Market or hedging tools from Intercontinental Exchange (ICE), larger participants using the PLATTS Market. In addition, many Chinese participants utilize the Shanghai Futures Exchange (SHFE) contract to hedge their risks. Despite the presence of these markets, there remains several constraints such as exchange rate fluctuations and large contract denominations.

Besides that, there have been controversies over the quality of fuel oil in recent years, where physically delivered fuel oil failing to meet the required specifications. The newly designed APEX Fuel Oil Warehouse Receipt (AFOWR) Delivery System is expected to overcome these obstacles, by warranting the product specifications through rigorous quality inspections.

Launch of 380cst Futures Contract
In light of the current situation, APEX launched the 380cst Fuel Oil Futures Contract, to create a platform for Energy industries and Financial institutions to hedge and invest in the fuel oil market. The contract comprises of several key features:

Firstly, the small contract size of 10MT/contract enables all market participants, small or large, to participate in the market. Furthermore, the contract is US dollar denominated, reducing exchange rate risks and providing investors with intuitive arbitrage opportunities such as spot-futures, cracking spread and cross-market arbitrage.

Secondly, the contract is expected to provide price transparency for the fuel oil market, as the contract is continuously traded in the market. Trading hours cover Platts Singapore, Shanghai Futures Exchange (SHFE) and Intercontinental Exchange (ICE), effectively connecting Singapore, Shanghai, European and American markets. This presents ample of trading opportunities, where clients can consistently receive live information on the fuel oil prices.

Lastly, the contract is settled through physical delivery, via the use of APEX Fuel Oil Warehouse Receipts. This unique method of physical delivery is the first in Singapore, and is expected to bring increased convenience to the fuel oil market. Participants can choose to load-in their fuel oil to APEX Approved Warehouses, where they can store or sell their products to potential buyers. The unique methodology ensures that the product is of satisfactory specifications during physical delivery, reducing the risks of low quality products.

Contact details of APEX are as follows:
Email: [email protected]
Office: 6914 2859

Photo credit: Asia Pacific Exchange
Published 12 April, 2019