NEW NYMEX SOUR CRUDE CONTRACT MAY PROVIDE TRADERS SWEET HEDGE

NEW NYMEX SOUR CRUDE CONTRACT MAY PROVIDE TRADERS SWEET HEDGE

The New York Mercantile Exchange's launch of trading in sour crude oil futures contract could provide the industry with its first viable sour crude hedging tool, if logistical problems don't hinder trading, analysts and traders said.

On the first day of trading Friday, the Nymex sour crude contract for May delivery, the first month available, opened at $16.10 a barrel and traded as low as $15.95 before recovering to $16.01 a barrel, down 9 cents at 1 p.m.In comparison, the Nymex West Texas Intermediate contract for May delivery was down 8 cents at $18.82 a barrel.

A Nymex spokeswoman said that 1,598 contracts had traded by 1 p.m. On the first day of WTI trading on March 30, 1983, 1,884 contracts changed hands, setting a Nymex first-day record. She said that with more than two hours left in the trading day, the sour crude contract might easily surpass that record.

Most traders and analysts surveyed said they expect the sour crude contract to be a success, in part due to Nymex's track record of having a strong local trading community to add liquidity to the market.

But they also caution that the logistics of trading both sour crude and sweet crude futures in the same pit on the already-cramped exchange floor could cause problems. Privately, Nymex officials have expressed similar concerns.

Nymex officials said there will be no changes in the way sweet crude oil futures contracts are traded. But traders wanting to make sour crude transactions will have to indicate their choice by shouting the word "sour" along with their bids under the exchange's open-outcry trading system.

Several industry officials have said trading could become confusing, particularly when both crude contracts are trading at around the same range. For example, a shouted bid to "buy 20 at 40," could be heard as a bid for sweet crude at $18.40 or sour crude at $16.40.

Still, after troubled attempts by exchanges in London and Singapore to start trading in Dubai futures, and stalled efforts by the Commodity Exchange here for a similar contract, the Nymex contract is expected to offer the first direct hedging instrument for the type of crude in strongest supply on world markets.

"Most of the crude oil in the world is sour crude," said Tom Bentz, a crude oil trader at United Energy Futures, New York. "West Texas Intermediate is a benchmark in the United States, but most of the OPEC crudes are sour. The sour contract will bring in more international participation.

"Now, the only way you can hedge a sour crude cargo is with (London) Brent or WTI, and both are sweet crude contracts. You are thus exposed to some kind of basis risk," he said.

Basis risk refers to the difference between the cash price of a commodity and a futures contract. When a hedge depends on the differential between a sour crude cash price and a sweet crude futures contract, the risk is increased.

Since the 1980s, the crude oils used by U.S. refiners have steadily become more sour, as average sulfur content increased from 0.88 percent in 1981 to almost 1.06 percent in 1990, Energy Information Administration figures show. Under Nymex specifications, allowable sulfur content for the contract will be a minimum of 0.5 percent and a maximum of 2.2 percent.

Under contract specifications, seven crudes will be deliverable against the contract: Alaska North Slope, Ecuador's Oriente, Oman, United Arab Emirates' Dubai, Norwegian Flotta, Iranian Light and West Texas Sour/New Mexico Sour.

The WTS/NMS crude will require a premium of 50 cents a barrel, because it currently commands a market premium, Nymex said.