- IFO 380 Rotterdam
- Hannes Wolff
GMT 20:01
14th Mar 2007Good day. We have a monthly requiry of about 2000 mt IFO 380 to be delivered in Rotterdam. My question is what derivative to use for hedging our exposure to the volatile bunker market? At the same time we would like to remain flexible, that means a 12 months swap would not be appropriate. I was thinking of futures, and not hedging the full quantity of bunker in order to participate in a possible falling market. But what about the hedging effectiveness of futures? Which futures to choose? And what about the liquidity? The bid-ask spread?
We bunker about the same quantity in Houston. So any suggestions on that will be helpful as well.
Thank you very mich in advance. Best regards, Hannes Wolff - Janet Lawrence
The Oxford Princeton Programme
GMT 10:10
15th Mar 2007
IP: x.x.157.231To Hannes Wolff:
Thanks for your question.
First of all, as you've obviously discovered, there are no exchange-traded derivatives available to hedge your bunker fuel. If you choose to use futures for hedging bunker fuel in Rotterdam and Houston, you'll have to run correlation analysis between those futures available on the NYMEX and ICE Futures to see which one (or perhaps a combination of more than one?) has the best correlation to the bunkers you buy in each location. If you don't have the ability to do that yourself, perhaps a consultant or a futures broker can assist. And remember that markets change -- a good correlation now might not be a good correlation under different market conditions.
You can always, as you suggested, also choose to not hedge the full volume of bunkers you buy. You would be taking additional risk if you didn't fully hedge, however.
As to liquidity and the bid/ask spread, you would have to ask your broker about that once you've chosen which futures are appropriate for your needs.
Janet Lawrence - Hannes,
Don`t look at WTI or Brent futures - you will have far too much basis risk on the crack.
To hedge your Rotterdam bunker requirement of 2KMT p/month, you should use the Rotterdam 3.5% Sulfur barge swap.
This is a simple swaps instrument on the wholesale price of 3.5% sulfur HSFO traded in a highly liquid market. In fact the volume of RDM3,5% swaps traded is more than 10 times the Rotterdam bunker market - you can very easily trade it.
For 2KMT either trade a full calendar 2008 (RDM3.5 CAL08) at 24KMT or trade the months individually, 12 times per year. To gte an effective price, call Gunnar Lindqvist at IMAREX in Oslo on +47 2389 4220.
For Houston you can use the USG3.0% Waterborne FO swap, which also trades in a liquid wholesale market. The counterpart to your tarde will likely be one of the oil majors or big bank.
If you have a clearing account with one of the big banks, you can get your trade cleared at NOS or NYMEX Clearport to avoid credit risk issues througout the period. If not, you will have to trade your requirements OTC - Over The Counter.
I am attaching a curve showing the historical movement in the RDM3.5 CAL08 contract over the past year. You can now buy it at around USD 355 p/MT as a hedge against higher prices.
Hope this helps - let us know if you need more.
Mikal Bøe
Managing Director
IMAREX Asia Pte Ltd
