Black gold? Drilling deeper into the SET's new oil futures

“Black gold” is our major energy source for everyday life, including transportation and industrial production, and not a day goes by without crude oil prices being mentioned on television, in newspapers or magazines.
There are three important crude oil benchmarks; Brent in Europe, WTI (West Texas Intermediate) in America, and Dubai in the Middle East. Though the prices of each benchmark are different due to differences in quality, they are highly correlated. Crude oil is traded in both over-the-counter and futures exchanges. Among crude oil futures, the light sweet crude oil (WTI) traded on the New York Mercantile Exchange (Nymex), and the Brent crude oil futures traded on the Intercontinental Exchange (ICE) are the most active contracts in the world, and prices here represent world oil prices.
 The Stock Exchange of Thailand will launch its own TFEX Crude Oil futures on October 17, to be based on Brent crude oil prices – a popular benchmark for Thai refinery.
The individual contract size is set at 100 barrels and is worth around Bt310,000. Cash-settled, the contract is settled against the Brent Index average calculated by the ICE. Daily trading will be from 9.45am to 10.30pm. The initial margin rates for retail clients will be Bt26,600 per contract, or approximately 8.5 per cent of contract value. However, the margin for spread trading will be only Bt6,650 per pair, as the spread position has less risk than the outright position.
There will be three consecutive months of oil futures available for trading: the November 11 series, December 11 series and January 12 series. Each contract will be traded until 10.30pm on the last trading day, which is usually around the middle of the month.
Oil futures trading involves risk due to the high rate of fluctuation. Nevertheless, it can provide investors with an opportunity to capture profit from movement of oil prices based on investor expectation. In addition, as crude prices have a low correlation with stock prices and other commodities such as gold and silver, oil futures can be a good choice for investors seeking to cut risk through diversification from equities. Meanwhile, for SME owners with high fuel consumption, especially those in the transport and logistics sectors, oil futures offer a low-cost, effective hedging tool with which to manage fuel costs.
In sum, oil futures present a new alternative for investors looking to profit or hedge from movements in oil prices. However, with such a highly volatile market, potential investors should learn as much as possible about oil futures prices and understand the risks involved before getting involved.

Rinjai Chaiyasut is head of Derivatives – Business Development at The Stock Exchange of Thailand.