Exchange operator Ice said it expects volatility to return to the crude markets after a sluggish first half of the year, spurred by increased instability in oil producing countries and large open interest in crude contracts.
Exchange operator Ice said it expects volatility to return to the crude markets after a sluggish first half of the year, spurred by increased instability in oil producing countries and large open interest in crude contracts.
Ice announced during a second quarter earnings call yesterday that the exchange experienced a 26pc reduction in total energy derivatives contract volume in the second quarter versus the same time last year. The exchange said crude contracts declined by 9pc, while natural gas contracts fell by 43pc. However, the exchange noted open interest in its Brent contracts is up 25pc over the same quarter last year, and open interest in other oil contracts is up 17pc.
Ice chief executive Jeff Sprecher said the phenomenon is attributable in part to the departure of large banks as market makers in the physical energy markets and the emergence of merchant energy companies in their place. Those companies, such as Gunvor, Mercuria and Vitol, are "active hedgers," Sprecher said, and maintain substantial open interest positions.
"What we've seen is open interest going up, and as soon as there's any hint of volatility in the market, there's just an amazing explosion of volumes," Sprecher said.
Sprecher added that the Brent crude market has in some respects become "used to political unrest, particularly in the Middle East," which has resulted in low volatility amid ongoing armed conflicts in Iraq, Syria, Israel and Palestine. However, the growing trade in contracts with a long-term expiration suggests that the conflicts will have an effect on crude prices sooner or later.
"The market is sending some longer-term price signals that they do think that there will be supply impact as a result of what's going on here," Sprecher said.
Trading volume and open interest in the North American natural gas market has continued to fall since its high in 2012, with average daily volume hovering around 1,000 contracts and open interest around 20,000 contracts in the first two quarters of 2014.
Sprecher said the "depressed" state of the gas market is continuing to adjust to the new ample supply, and that supply transportation, exportation and consumption infrastructure is not yet available. But when the market is better able to handle the natural gas resources in North America and send LNG abroad, Sprecher said, natural gas as a commodity will "likely globalize."
Despite the lower volumes in the exchange's energy complex, Ice posted quarterly revenue of $750mn and an adjusted operating income of $363mn, up from $237mn in the second quarter of 2013. Ice attributed its strong performance to higher volumes in other contracts, lower expenses and diversification across global markets.
