By Mike Davis, Director of Market Development,Oil Markets, ICE
With the ICE Low Sulphur Gasoil futures contract breaking through one million contracts of open interest and trading volume up double-digits year to date, we take a look at some of the reasons behind the contract’s growth.
Benchmarks aren’t created overnight. Any new contract takes time to become established, and its ultimate success depends on how well the contract specifications meet the hedging needs of the evolving marketplace.
Today, ICE Low Sulphur Gasoil futures is the world’s leading middle distillate benchmark for the oil market, making it the go-to price marker for the middle part of the refined barrel. But that wasn’t always the case. It was a long road between the launch of the contract and the day it hit 1 million contracts of open interest.
Four of the key reasons behind Low Sulphur Gasoil’s evolution to become the world’s diesel benchmark:
- An expanding diesel market. The first reason behind the importance of Low Sulphur Gasoil futures is that the underlying market itself has continued to expand, and is particularly significant in Europe where diesel dominates transport fuels, especially commercially. The long-term increase in global trade and diesel haulage has led to a rise in demand for diesel fuel. This in turn has led to increased demand from refineries to meet this rise in diesel transportation, including for winter conditions. At the same time, near-zero sulphur diesel specifications have become the global norm. More diesel is itself being exported and transported across longer sea distances.
Today Low Sulphur Gasoil plays a comparable role to Brent in relation to its portion of the refined oil barrel.
- Gasoil as an aggregator of the refined barrel. Another factor driving the contract’s growth into a world benchmark is that Gasoil is a convenient aggregator for the refined barrel globally. Gasoil, diesel and jet fuel are moving all over the world from refineries to delivery points where the end product is consumed. The Low Sulphur Gasoil contract has therefore become an important and efficient hedging and trading mechanism, providing market participants with access to the whole range of products in a single contract.
- Liquidity, efficiency and transparency. Market participants can trade ICE Low Sulphur Gasoil futures in a highly liquid market where the depth and breadth of the market offer significant efficiencies and ease of trading. Liquidity across the forward curve also helps to reduce both the cost and friction of execution. The ability to see prices and transact in related products, such as Brent and Jet Fuel, while managing price risk in Gasoil, make for a more complete hedging solution.
- Mid-barrel refining capacity and desulphurisation. Finally, the expansion in production and desulphurisation capacity in the middle distillate part of the refined barrel, has gone hand in hand with Low Sulphur Gasoil’s growth as a price marker and benchmark.
Refineries are increasing their capacity for diesel fuel specifically in response to the growing demand for the underlying product, which means there’s more diesel on the market. Today Low Sulphur Gasoil plays a comparable role to Brent in relation to its portion of the refined oil barrel. The price relationship between the two is closely watched as an indicator of margin value across refineries in Europe, the Middle East and Asia where middle distillates form the most significant value component of the refined product oil barrel.
As established global benchmarks, Brent and Gasoil have proven value in helping participants adapt to evolving global markets and enabling price discovery for oil market participants around the world.
Learn more about the importance of oil benchmarks and oil hedging mechanisms here.