U.S. export flows create more demand for Asia-focused hedging
The Tokyo Commodity Exchange is hoping to build closer connections with crude oil traders in the U.S. through an agreement with Net Energy Group, a Canadian company that provides an online trading platform and brokerage services for the North American crude oil market. The agreement, which was announced in April, reflects Tocom's efforts to boost its oil futures market by linking it to the increased flow of oil exports from the U.S. to Asia.
U.S. oil production has exploded in recent years due to the use of fracking to extract oil and natural gas from shale formations. In 2015, laws restricting the export of oil were lifted, and since then the amount of oil exported overseas has risen rapidly. In 2017, U.S. oil exports hit 1.1 million barrels a day, up 89% from the previous year and four times the previous peak in 1980, according to the Energy Information Administration. Much of that flow went to Asia, with China being the second largest destination after Canada and South Korea the fifth-largest.
Tocom lists futures based on the price of crude oil in Dubai, which is used as a benchmark for pricing crude oil shipped to Asia. But trading activity in the Tocom contract is far below its counterparts in London and New York. Total volume in 2017 was 5.3 million contracts, compared to 310.1 million for the WTI crude oil future traded on CME and 241.5 million for the Brent crude oil futures traded on ICE Futures Europe.
Tocom also faces a challenge from China. The Shanghai International Energy Exchange, a subsidiary of the Shanghai Futures Exchange, launched a crude oil futures contract in March that tracks the price of oil imported into China. INE has been set up to encourage foreign participation, and its goal is to develop the contract into a benchmark for the entire Asia-Pacific region.
That makes it all the more important for Tocom to find new customers through the Net Energy partnership. Under the terms of the agreement, Tocom's crude oil futures will be added to Net Energy's OTC trading platform. Matched orders will flow to the exchange as an off-floor transaction, similar to the kinds of trades that are routed to CME Group through its Clearport facility.
Net Energy was founded in 2005 as an independent broker and gained approval from Canadian regulators in 2016 to operate a derivatives exchange for crude oil. The company is based in Calgary and has an affiliate in Houston to service the U.S. market, and it is now planning to open an office in Japan. It currently provides trading services to more than 350 companies, including banks, oil firms and government agencies. It also has a partnership with CME Group under which its contracts can be cleared through Clearport.
Tim Gunn, the president of Net Energy, said that his firm has been interested in expanding into the Asian marketplace for many years and looks forward to capturing the growing trading opportunities between the two regions. He added that the energy in Japanese markets today reminded him of the time he spent in Japan as a foreign exchange trader in the 1980s, when markets were growing very rapidly.
"Government, companies and young people are taking risks that I haven’t seen for a long time," he said. "It’s a very positive atmosphere."
The two companies have already started working together in the U.S. Takamichi Hamada, the president and chief executive officer of Tocom, travelled to New Orleans in March to attend the annual meeting of the American Fuel and Petrochemical Manufacturers, a trade association that represents companies involved in refining oil. The two organizations co-sponsored a reception at the AFPM event to highlight the opportunities for trading Tocom's products.
“We are pleased to be strengthening our ties with Net Energy," Hamada said. "Tocom's products, combined with Net Energy’s solid track record in North America, set the stage for an exciting new opportunity.”
