How the World's Oil Markets Have Evolved
Written by David Peniket, President & Chief Operating Officer, ICE Futures Europe and originally published in FUSE Energy
Crude oil is one of the most widely used and actively traded products in the world and accordingly the price of oil remains center stage as an important economic indicator for both present conditions, as well as expectations for the future.
The concept of oil futures contracts is not new. Contracts based on West Texas Intermediate (WTI) light sweet crude oil
were first introduced in the 1980s in the United States following tension in the Middle East which drove oil price increases and a great deal of supply and price uncertainty. In the 1980s, the International Petroleum Exchange, which is known today as ICE Futures Europe and is part of Intercontinental Exchange’s group of global exchanges (NYSE: ICE), introduced futures contracts based on Brent crude oil, also a light sweet crude which is found in the North Sea, and Gasoil, which was essentially European heating oil. These futures contracts were designed to provide a means for protection against price fluctuations for market participants in the European crude and refined oil market. Today, firms from the U.S. to Asia that need to buy large volumes of crude or refined oil such as airlines, oil producers and refiners, use oil futures to protect and “hedge” against rising or falling prices and market volatility which can occur especially in times of geopolitical turmoil when global supply may be volatile.
futures are two of the most widely traded crude and refined oil futures contracts in the world; together they trade more than one million contracts each business day.
How have Brent and Gasoil futures evolved to reflect changing dynamics in the physical oil markets?
Trading in Brent and Gasoil futures markets has evolved in recent years as the dynamics of the physical markets for crude and refined oil have changed due to a range of factors from supply and demand to changes in regulation and an increase in the demand for hedging price risks, to the increased focus on cleaner energy and fuel products.
Since its launch in 1988, the ICE Brent futures
contract has evolved continuously in order to remain the most relevant and global oil price indicator, including the incorporation of new oilfields and a less prompt expiry date for the underlying North Sea physical crude. These measures have helped to sustain and improve liquidity in the underlying North Sea oil market, meaning that Brent futures are based on a crude oil market of more than three-quarters of a million barrels of physical oil a day.
The ICE Brent futures contract is a key component of the Brent oil complex
and has a direct link to the underlying North Sea physical market. And with up to two-thirds of globally traded oil priced relative to the Brent complex
, ICE Brent plays a vital role as the benchmark that is relied upon as a marker for the world’s oil price. Today it trades at a premium to US crude (WTI) due to its versatility in shipping to eastern and western countries as a seaborne, rather than land-locked, crude.
Gasoil is a diesel-based contract and is physically delivered by barge in the Amsterdam, Rotterdam and Antwerp region of continental Europe. It is used as the pricing reference for all middle distillate trading in Europe and beyond. The prices for Gasoil and Brent are often linked with refining margins and supply and demand in the distillate market, often impacting the price of Brent.
As Europe has adopted cleaner and lower sulfur energy and fuel products, the ICE Gasoil futures contract has undergone a shift in recent years to a low sulfur specification to align it with patterns that have been occurring in the physical market for some time. As a result, in early 2015, ICE transitioned some 460,000 Gasoil contracts representing approximately 46 million metric tonnes of diesel to a new and lower sulfur contract specification based on 10 parts per million (ppm), instead of the former 1,000 ppm. This reduces the level of pollution that is emitted from the use of these products.
Brent and Gasoil futures have retained their roles as the world’s crude and refined oil benchmarks because they have evolved in line with the physical markets over the course of the last three decades.
ICE and the Global Energy Market
ICE’s global energy exchange, ICE Futures Europe
, has expanded significantly since the launch of Brent and Gasoil in the 1980s. It serves thousands of companies around the world highly liquid markets on its electronic trading platform, with more than 1,000 energy contracts across oil, natural gas and electric power. ICE’s energy markets play an increasingly important role in the price risk management and hedging strategies of global energy producers, refiners and users in North America, Europe, Middle East and Asia.
David Peniket is the President and Chief Operating Officer of ICE Futures Europe, the London-based energy exchange that is part of the Intercontinental Exchange (NYSE: ICE). In this role, Peniket oversees all technology, market operations and financial functions at ICE Futures Europe. Peniket will additionally serve as President and COO of NYSE Liffe subject to regulatory approval. Prior to joining ICE in 2001, Peniket served as Director of Finance at the International Petroleum Exchange (IPE), today known as ICE Futures Europe, since May 2000. Before joining IPE, Peniket was an accountant at KPMG since 1992, where he worked as a consultant in the company's financial management practice. In addition, Peniket served as a Research Assistant to John Cartwright, SDP Member of Parliament prior to assuming a career in finance. Peniket earned a Bachelor of Science degree in Economics from the London School of Economics and Political Science and is also a Chartered Accountant.