Canadian Oil Derivatives: What's missing?

The recent Energy Risk conference hosted in Calgary, AB this June brought to life some points of contention around Canadian oil derivatives during a panel advocating for a unified Canadian oil benchmark.

Read the full article summarizing the panel below or click here.

Fragmentation seen as holding back Canadian oil derivatives

Author: Alexander Osipovich
Source: Energy Risk | 19 Jun 2014

The existence of several rival price indexes for Western Canadian Select is hindering the growth of financial trading in heavy crude oil from Alberta, market participants say

Despite some improvement in liquidity in Canadian heavy crude oil derivatives, financial trading in Western Canadian Select (WCS) has yet to really take off, market participants complained during a panel discussion at Energy Risk Canada in Calgary on June 17.

Perry Undseth, president and chief executive of One Exchange, a Calgary-based energy broker, voiced disappointment that the market had not yet coalesced around a single, unified benchmark contract for Canadian heavy crude – a contract that might eventually attain the same sort of prominence as West Texas Intermediate (WTI) or North Sea Brent, the prevailing global oil benchmarks.

“What I think is lacking, really, is branding,” Undseth said. “There isn’t really a Canadian-branded benchmark. If you look at the global oil market, everyone talks about WTI and Brent. Canada is a pretty significant oil producer, and that presence is going to grow over the next decade. Why is it that we don’t have a Canadian-branded benchmark?”

There is no single broker, exchange or price reporting agency that publishes an index broadly regarded as the canonical price of WCS. Most WCS transactions are handled by three Calgary-based brokers: Net Energy, Shorcan Energy Brokers and the smaller One Exchange. Net Energy and Shorcan publish competing indexes for the price of WCS, and many market participants use a blended, volume-weighted average of the two, while others use an average that includes prices from all three brokers.

Because of disagreement over which index to use, market participants remain uncomfortable trading financially settled contracts in WCS. Unlike in WTI or Brent, where financial trading dwarfs the small volumes of physical trading that take place, the WCS market remains firmly physical, according to Undseth. “Right now we see the physical outstripping the financial,” he said.

Several exchanges have attempted to launch WCS futures contracts, with limited success. Lately, Chicago-based CME Group has enjoyed some modest success with its Canadian Heavy Crude Oil Index (Net Energy) Futures, known by their product symbol WCC. From June 2011 to June 2013, open interest in WCC skyrocketed from 690 lots to 20,460 lots, an increase of almost 3,000%. But the contract has faltered since then, with open interest slumping to 14,100 lots in May 2014, according to CME Group data. The contract is linked to the WCS index published by Net Energy, and most of the volume reflects swaps brokered by the company and submitted for clearing.

Undseth and his fellow panellists said it would preferable for a benchmark contract to reflect a broader underlying pool of WCS transactions, not just those brokered by Net Energy. Tim Pickering, founder and chief investment officer of Auspice Capital Advisors, a Calgary-based commodity-focused hedge fund, said such a benchmark was needed to draw in financial players, including institutional investors seeking exposure to WCS. Such investors are “befuddled” by the current WCS pricing system, he said.

During the coming months, Auspice plans to launch its own index for Canadian heavy crude, the Canadian Crude Index (CCI). Eventually, Auspice hopes CCI will be used as the basis for an exchange-traded fund (ETF) that retail investors can use to include Canadian crude oil in their portfolios, alongside other commodity ETFs. However, getting the various brokers to share transaction information was a huge challenge, Pickering said. “It has been really difficult,” he said. “It’s been like herding cats to get the brokers to agree to this.”

By coincidence, the panel discussion took place the same day Canada’s federal government granted approval for Calgary-based midstream firm Enbridge to build its proposed Northern Gateway pipeline, linking Alberta to the Pacific Ocean through the port of Kitimat in British Columbia. If completed, the pipeline would allow Canadian heavy crude to reach Asian markets. Currently, the US is the predominant export market for crude produced in the Alberta oil sands.