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IntercontinentalExchange (ICE) operates regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets. ICE became a center for global petroleum risk management and trading with its 2001 acquisition of the London-based International Petroleum Exchange (IPE), now known as ICE Futures Europe.
Brent crude oil, gasoil and West Texas Intermediate (WTI) crude oil have traded on ICE Futures Europe and its IPE predecessor since June 1988, April 1981 and February 2006, respectively. Along with half the worlds trade in crude oil and refined futures, ICE Futures Europe offers market-leading futures and options contracts on U.K. natural gas, U.K power, emissions and coal.
THE EUROPEAN REFINED PRODUCTS MARKET Even before the commercial production of crude oil in the North Sea in the 1970s, Europes petroleum refining industry was defined by geography. With its dense network of rivers canals, deepwater ports and other transportation infrastructure, the Amsterdam-Rotterdam-Antwerp (ARA) corridor of the Netherlands and Belgium was an obvious center for the refined products market. A secondary refining center was later established in northern Italy to receive crude oil shipments from North Africa and from Russian Black Sea sources. Gasoils chemistry also offers stability in transportation and Just as futures entered the U.S. energy sector with the introduction of heating oil contracts, the IPEs first products included gasoil futures contracts, which were introduced in storage. It is a less volatile substance than gasoline, and does not include gasolines light blending components, such as butane or ethanol, or heavy detergent additives which are April 1981. Both heating oil and gasoil are middle distillates, the class of refined products heavier than gasoline and naphtha, but lighter than heavy fuel oils (with relative weight being as the amount of refining. The middle distillates were suited well for this role while crude oil grades are differentiated, and refined products such as gasoline and jet fuel have unique grades, the middle distillates are relatively undifferentiated in this respect. In addition, they serve as both household and transportation fuels heating oil and diesel respectively.


common to gasoline and tend to separate over time. Along with pricing and hedging gasoil itself, the gasoil contract serves as the basis for an active over-the-counter swap and spread market against other refined products, such as jet fuel and U.S.-basis heating oil. ICE Gasoil futures serve as the pricing basis for markets as disparate as Russian gasoil exports to Europe and Western Hemisphere gasoil imports from the Middle East, Asia and Europe. The utility of ICE Gasoil futures has also grown as Asian and Middle Eastern refiners increase production of low-sulfur middle distillates that are tradable against the ICEs benchmark contract. REFINERIES, PIPELINES AND CRACKERS IN EUROPE

Source: Association Of Petrochemical Producers In Europe


THE CRACK SPREAD For refiners and traders, the ICE Gasoil futures contract is essential for pricing and hedging refinery economics as part of a crack spread trade. The crack spread between Brent crude and Gasoil is a function of the demand for distillates downstream and the price of crude oil upstream. Its a complex dynamic, often more influenced by consumer or middle distillate demand (such as demand for diesel in the European auto market) than by factors in the global crude oil market. In the U.S. and Europe, refining capacity has been a scarce resource for much of the past few decades, with little brought online in recent years despite generally rising consumption


Source: CRB-Infotech CD-ROM


trends. A refinery is something like a city: expanding capacity takes much more than new processing units; it also requires an entire infrastructure of pipelines, tanks, fuel sources, power supplies and both land- and water-based docking and terminal facilities. Moreover, as environmental concerns have increased on both sides of the Atlantic, the number of localities willing to consider new refineries or expansions of existing facilities has declined sharply. Scarcity of refining makes all refining margins or crack spreads highly volatile to the upside. Any unexpected increase in demand, such as unusually cold weather or an unexpected supply shock such as a refinery fire, will trigger a sudden expansion of refining margins. But margins can collapse almost as quickly once these issues are resolved. Surprisingly, the pattern of daily returns for a 2-1-1 crack spread one barrel of Dated Brent refined into one barrel each of gasoil and gasoline at Northwest Europe is skewed negatively at -0.126. This is a rarity in the world of commodity processing margins. (Dated Brent is a crude cargo whose loading date has been established and is generally considered the spot market for Brent crude). DISTRIBUTION OF DAILY RETURNS ON DATED BRENT 2-1-1 CRACK SPREAD January 1992 - March 2009



Source: Bloomberg

Because demand for heating fuel is seasonal, the 2-1-1 crack spread is strong between April and November, and weak during the winter months. Much of this seasonal shift is also attributable to higher demand for gasoline in the summer months and to relatively lower gasoil output from European refineries during these months.


Source: Bloomberg

Source: CRB-Infotech CD-ROM

In addition to the multi-product crack spreads illustrated above, ICE Futures Europe offers a direct, tradeable gasoil crack spread contract between ICE Gasoil and ICE Brent crude futures. View the ICE Gasoil futures crack contract spec.

The Dated Brent 2-1-1 crack spread is unusual for another reason. Very few crude oil price movements worldwide can be linked to refinery netbacks, or the sum value of refined product slates due to differing refinery configurations in each market. Therefore, the price of Dated Brent tracks the 2-1-1 crack spread at Northwest Europe with a four-week lag.


VOLATILITY ICE Futures Europe gasoil has an irregular volatility pattern. Unlike heating oil, which tends to have a demand skew of volatility rising with price as fuel buyers seek to cap costs, gasoil exhibits periods of investor skew, where volatility increases as price falls. This indicates refiners and terminal operators are using gasoil futures and options to place price floors under their output. This was the case for implied and historic volatility during the price collapse of the second half of 2008. GASOIL VOLATILITY SPIKED DURING PRICE COLLAPSE

The conversion factor of 312.9 is derived from 2 conversions: Metric Tons to Barrels (7.45) Barrels to Gallons (42:1) Traders can use the ICE Futures Europe Heating Oil/Gasoil spread contract, which is cash-settled on the heating oil leg in New York Harbor and delivered into a gasoil futures contract on the gasoil leg. View ICE HOGO futures spread contract spec. The negative values observed in much of the April 2009 arbitrage indicate heating oil at New York Harbor was too expensive to ship across the Atlantic into ICE Futures Europe delivery. As the overall price of distillates fell, the arbitrage moved closer into solution, which implies that the U.S. market had become even more over-extended to the upside than had the European market over this period. THE APRIL 2009 HEATING OIL/GASOIL ARBITRAGE

Source: Bloomberg

PRODUCT SPREADS Gasoils central role in the refined product slate makes the ICE Gasoil futures contract a useful tool for traders in related products. One such actively traded spread is between heating oil and gasoil futures. Commonly used conversions are 7.45 barrels per metric ton and 3.129 cents per gallon to dollars per metric tonne. The interaction between the Heating Oil and Gasoil contract sizes and conversions can be illustrated in reference to the ICE on-screen tradable HOGO spread. Heating Oils contract size mirrors that of Crude contracts at 1000/bbls, but pricing in cts/gallon means that barrels are converted into gallons at 42 gals/bbl. The minimum HOGO Spread quantity is 4 lots, made up of 3 Heating Oil lots and 4 Gasoil lots (a similar practical ratio to that usable for Gasoil to Brent, also 4:3). U.S. Heating oil is priced in USD per gallon and European Gasoil is priced in USD per metric tonne. The Gasoil conversion factor from Metric Tonnes to USD per Gallon is 312.9. To convert Gasoil into USD/gal, divide the price by 312.9. The spreads of key European products such as AmsterdamRotterdam-Antwerp (ARA) jet fuel barges and cargos of Russian gasoil delivered to Northwest Europe have been quite active, especially in recent years. The premium to ICE Futures Europe front-month gasoil for jet fuel expanded enormously during the bull market of 2003-2008; this is a typical pattern for jet fuel. The spreads for cargos of Russian gasoil became highly volatile during the rising market and then fell to a discount as overall prices fell in the second half of 2008.
Source: Bloomberg




Mediterranean barge markets have hedge ratios just over 0.50 and therefore can be hedged with half the volume of ICE Gasoil futures. ARA AND WESTERN MEDITERRANEAN NO. 6 FUEL OIL VS. ICE GASOIL FUTURES

Source: Bloomberg

Even though different cuts of the barrel have different demand characteristics, seasonality and price competition, ICE Futures Europe gasoil is a good hedge vehicle for several of them. Naphtha (NAP) and gasoline (PGNWE) barges at ARA are lighter products than gasoil and are dedicated primarily to the petrochemical feedstock and transportation markets, respectively, and both are considerably more volatile than gasoil. And yet both markets can be expressed as a tight linear function of front-month gasoil futures; their hedge ratios and r-squared values meet the tight standards of the U.S. Financial Accounting Standards Board Rule 133 of a hedge ratio between 0.8 and 1.2 and an r-squared greater than 0.80. ARA BARGE GASOLINE AND NAPHTHA VS. ICE GASOIL FUTURES The ICE Futures Europe Gasoil futures contract is useful in Asian markets as well, and is likely to grow as Middle Eastern refiners increasingly arbitrage the distillate fuel markets of Northwest Europe, the Mediterranean, the Middle East and Asia. Mapping 0.5% sulfur gasoil (used in the historic analysis as the low-sulfur grades have too short of a history) and both 180 and 380 centistoke high-sulfur No. 6 fuel oil against frontmonth gasoil futures demonstrates the same tight hedge relationship seen in the European markets. Once again, the hedge ratios for the No. 6 fuel oils are low in reflection of their lower price volatility. SINGAPORE DISTILLATES VS. ICE GASOIL FUTURES
Source: Bloomberg

Source: Bloomberg

A simple linear hedging model for No. 6 fuel oil, 1.0% sulfur, does not meet the FAS 133 bona fide hedging requirement by virtue of its much lower hedge ratio; both ARA and Western
Source: Bloomberg


A similar pattern can be observed across the Atlantic Basin in the cash markets at the U.S. Gulf Coast for both No. 2 heating oil and No. 6 1.0% fuel oil. U.S. GULF COAST DISTILLATES VS. ICE GASOIL FUTURES

ICE FUTURES EUROPE GASOIL FUTURES CONTRACT The key specifications of the ICE Futures Europe Gasoil futures contract are:









Source: Bloomberg



THE OTC WORLD ICE OTC markets offer broker submissions for clearing and direct execution services for a wide range of commonly traded crude oil and refined product swaps. Many of the hedge relationships illustrated above are traded as swaps to reduce basis risk and are cleared on ICE OTC to reduce counterparty clearing risk and enhance position management. View a complete list of ICE OTC cleared products. The growth of petroleum trading outside New York, London and other traditional exchange centers has increased the number of markets traders must follow. As the potential for liquidity fragmentation has increased with the proliferation of markets, so has the need for centralized price transparency and central clearing. ICE Futures Europe and ICE OTC markets offer a full range of execution, clearing and risk management tools to commercial and financial energy traders.







Gasoil futures can be traded at settlement (TAS). This is an invaluable feature for traders who need to match cash market deals to the ICE Futures Europe settlement price. Options on the ICE Gasoil futures contract are also available. Gasoil options are listed for thirteen consecutive months plus the four subsequent June/December expiries for a total of 17 listed expiries. A new contract is added immediately following the expiry of the front option month. Each American-exercise option settles into the underlying futures contract. Strikes are listed in increments and decrements of $5 per metric ton. Trading ceases five days prior to the scheduled cessation of trading for the relevant contract month of gasoil futures.

HELPFUL LINKS Complete ICE Gasoil Futures Contract Spec ICE Gasoil Futures Tas Contract Spec ICE Gasoil Options Contract Spec A Schedule of Exchange Fees


TRADING ICE FUTURES EUROPE GASOIL FUTURES AND OPTIONS Futures markets exist for price discovery and risk transfer. Price discovery is the more straightforward. Buyers and sellers meet in a competitive market place, and the prices resulting from each transaction signal to other traders what a given commodity might be worth. This process is vastly different from the fundamental analysis approach to a market, in which a theoretical market clearing price is deduced from supply and demand data. There is no theory involved in price discovery: it is what it is. Anyone accepted by a clearing firm or other licensed futures brokerage can participate in the price discovery process, irrespective of participation in the petroleum business. A market participant not in the petroleum business will be classified as non-commercial. A market participant in the petroleum business will be classified as a commercial or hedging trader. Hedgers make heavy use of gasoil options. Refiners can put a floor underneath their selling price with long put options, and buyers can put a ceiling over their costs with long call options, among other strategies. In a futures trade, the trader and the counterparty to the trade will post initial or original margin with a futures commission merchant or clearing member. Minimum margins are set by ICE Futures Europe, but the clearing futures commission merchant can demand additional funds. ICE Clear Europe has entered into an agreement with the CME Group for the use of SPAN4 for margin calculations. View an on-line guide to current margin rates.

traders account increases. The trader may withdraw these funds down to the maintenance margin level, depending on the account agreement. If the market moves adversely lower for a long position or higher for a short position the trader will be required to post additional funds, called variation margin, with the futures commission merchant to sustain the maintenance level. These margin calls assure both the futures commission merchant and the ICE Clear Europe exchange clearing house of performance. All futures accounts are marked-to-market daily, and participants deficient in the margin obligations can have positions liquidated involuntarily. As the designated clearing house for ICE Futures Europe, ICE Clear Europe stands as the financial counterparty to every futures and options contract traded on the exchange. The clearing house matches long and short positions anonymously and guarantees financial performance. What do the financial flows look like in a futures trade? Lets say a five-contract June futures position is initiated at $390 per metric ton and the market rises to $395.50 per metric ton on the following trading day. For the long position, the gain is: - 5 contracts x [395.50 390.00]/contract x $100 per $1.00 = $2,750 For the short position, the loss is equal and opposite: - 5 contracts x [390.00 395.50]/contract x $100 per $1.00 = -$2,750 If the price path reverses, so are the gains and losses. Lets

There are no margin requirements for long option positions. The margin requirements for short option positions vary according to the relationship between the option strike price and the futures price. If the market moves in favor of the trader higher for a long position (or commitment to take delivery of gasoil or to offset the contract by selling it prior to delivery), or lower for a short position (or commitment to deliver gasoil or to offset the contract by buying it prior to delivery) the equity in the

change the starting price to $398 per metric ton and have the market decline to $391.75 per metric ton the next day. For the long position, the loss is: - 5 contracts x [391.75 398.00]/contract x $100 per $1.00 = -$3,125 For the short position, the gain is equal and opposite: - 5 contracts x [398.00 391.75]/contract x $100 per $1.00 = $3,125


Options traders see the same directional profit and loss profiles relative to price, but the actual profit and loss is subject to a host of factors including the volatility of the market, time to expiration, interest rates and the relationship between the current futures price and the options strike price. RISK TRANSFER Risk transfer is the second purpose of a futures market. Any refiner, terminal, reseller or holder of gasoil inventories, or anyone at risk if the price of gasoil declines, is long the market. These participants can offset risk by going short a futures contract. Any fuel buyer or consumer at risk if the price of gasoil increases is short the market and can offset risk by going long a futures contract. The mechanics and financial flows are identical to those outlined above. A refiner at risk to prices falling can acquire a financial asset, the short futures position, which will rise in value as the market declines. The opposite is true for a fuel buyer at risk to prices rising; there a long futures position will rise in value as the market rises. While the financial flows should offset the economic gains and losses of the physical gasoil position, there are two important things to remember. First, even though futures prices converge to cash prices at expiration, the convergence process is subject to basis risk, or differences due to changes in hedging demand, location of the gasoil and quality differentials. Second, while the economic gains on, for example, a storage tank of gasoil are real, they are not realized until the gasoil is sold. If this inventory is hedged with a short futures position and the market rises, the storage operators will have to keep posting additional funds in the margin account. Nothing in the above discussion of hedging indicates when or at what price to hedge. This is one of the reasons options are valuable to hedgers. While the refiner may wish to have downside protection or price floor, that same refiner probably wants to participate in any future price increases. The producer concerned about a decline in the value of gasoil between now and the time he expects to be able to deliver gasoil in June could buy a June $410 put option, which is the right, but not the obligation, to receive a short position in a June future

at $410 for $41.75, or $4,175. The purchased put guarantees the producer the right to sell the June future for an effective price of $368.25 per metric ton (the $410 strike price less the premium paid of $41.75). This right gives him protection if gasoil prices have fallen by the expiry of the June option, but at the same time preserves his ability to profit should the price of gasoil move higher over the period. The fuel buyer wishing to cap the price of gasoil but not be exposed to margin calls should the price continue to rise can do an opposite trade and buy a June $410 call option for $43.25, which is the right, but not the obligation, to receive a long position in a June future at $410 for $43.25, or $4,325. The purchased call gives the fuel buyer the right to buy the June future at an effective price of $453.25 per metric ton (again, the strike price of $410 plus the premium paid of $43.25), offering protection against an unfavorable rise in the price of gasoil while preserving the ability to take advantage if prices in fact decline. It should be noted that the risk profile for sellers of options is dramatically different than for buyers of options. For buyers, the risk of an option is limited to the premium or purchase price paid to buy the option. For sellers, the risk profile is unknown and can be potentially quite large. Options trading can become complex quickly and involves the interplay of time remaining to expiration, the volatility of the commodity, short-term interest rates and a host of expected movements collectively called the Greeks.


ABOUT ICE IntercontinentalExchange

TRANSPARENCY (NYSE: ICE ) operates leading regulated

Price transparency is vital to efficient and equitable markets. ICE offers unprecedented price transparency and ensures that full depth of market is shown. Trades are executed on a first-in/first-out basis, ensuring fair execution priority. ICE also displays a live ticker of all deal terms and maintains an electronic file of all transactions conducted in its markets.

exchanges, trading platforms and clearing houses serving the global markets for agricultural, credit, currency, emissions, energy and equity index markets. ICE Futures Europe trades half of the worlds crude and refined oil futures. ICE Futures U.S.

and ICE Futures Canada

list agricultural, currency and Russell Index markets. ICE offers trade execution and processing for the credit derivatives markets through Creditex and clearing through ICE Trust. A component of the Russell 1000 and S&P 500 indexes, ICE serves customers in more than 50

ICE FUTURES EUROPE REGULATION vs ICE FUTURES U.S. ICE Futures Europe is a Recognised Investment Exchange in the U.K., supervised by the Financial Services Authority (FSA) under the terms of the Financial Services and Markets Act 2000. As a consequence, the ICE platform supports an orderly, regulated futures market thanks to

countries and is headquartered in Atlanta, with offices in New York, London, Chicago, Winnipeg, Calgary, Houston and Singapore.

LEADING ELECTRONIC TRADING PLATFORM ICEs electronic trading platform provides rapid trade execution and is one of the worlds most flexible, efficient and secure commodities trading systems. Accessible via direct connections, telecom hubs, the Internet or through a number of front-end providers, today, ICE features 3 millisecond transaction times in its futures markets the fastest in the industry. ICE offers numerous APIs for accessing futures and (overthe-counter) OTC markets, including a FIX API.

its wide availability, open participation and complete documentation of all orders. ICE operates its sales and marketing activities in the U.K. through ICE Markets which is authorized and regulated by the FSA as an arranger of deals in investments and agency broker.

HELPFUL LINKS FOR GETTING STARTED ICE Help Desk ICE Education Programs Corporate Overview

INTEGRATED ACCESS TO GLOBAL DERIVATIVES MARKETS ICEs integrated marketplace offers futures and OTC, cleared and bilateral products on a widely-distributed electronic platform that provides quick response times to participants needs, the changing market conditions and evolving market trends.

For additional information: Choose from a complete list of all ICE contacts


| telephone

U.S. +1 770 738 2101

or U.K.

+44 (0)20 7488 5100

This brochure serves as an overview of the gasoil futures and options markets of ICE Futures Europe. Examples and descriptions are designed to foster a better understanding of the gasoil futures and options market. The examples and descriptions are not intended to serve as investment advice and cannot be the basis for any claim. While every effort has been made to ensure accuracy of the content, ICE Futures Europe does not guarantee its accuracy, or completeness or that any particular trading result can be achieved. ICE Futures Europe cannot be held liable for errors or omissions in the content of the brochure. Futures and options trading involves risk and is not suitable for everyone. Trading on ICE Futures Europe is governed by specific rules and regulations set forth by the exchange. These rules are subject to change. For more detailed information and specifications on any of the products traded on ICE Futures Europe, contact ICE Futures Europe or a licensed broker.

IntercontinentalExchange is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union and the United States. ICE is a Registered Trademark and Marque Deposees of IntercontinentalExchange, Inc., registered in Canada, the European Union, Singapore and the United States. ICE Futures U.S. and ICE Futures Europe are Registered Trademarks of IntercontinentalExchange, Inc., registered in Singapore and the United States. ICE Clear U.S. is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union, Singapore and the United States. Russell 1000 is a Registered Trademark of the Frank Russell Company. U.S. Dollar Index is a Registered Trademark of ICE Futures U.S., Inc., registered in the United States. USDX is a Registered Trademark of ICE Futures U.S., Inc., registered in Japan and the United States.