product guide - ice · 2009. 12. 8. · the u.s. gulf is a key region for the u.s. oil industry,...

Trading and Clearing theArgus Sour Crude Index (“ASCI”)

with ICE

PRODUCT GUIDE

This guide is intended to provide essential background on the evolution

of the U.S. Gulf Coast sour crude market as it relates to ASCI index,

as well as the instruments ICE has made available for participants

in those markets for the purposes of hedging or trading. Additional

information on the underlying ASCI index component markets are

available through the resources highlighted in this guide.

THE ARGUS SOUR CRUDE INDEX (“ASCI”)

According to Argus:

”The Argus Sour Crude Index (“ASCI”) represents the daily value

of U.S. Gulf coast medium sour crude, based on physical spot

market transactions. The ASCI index primarily serves buyers

and sellers of imported crude that need a broader index of U.S.

sour crude value for use in long-term contracts.”

The ASCI index is a single price for a basket of three crudes

– Mars, Southern Green Canyon and Poseidon. Prices are

compiled by Argus from their office in Houston. The ASCI

index is published as a differential to West Texas Intermediate

(WTI) crude oil and as a flat price. A document on the Argus

website describes the ASCI index methodology in detail, and

is available at: www.argusmedia.com/methodology. More

background on sour grades and their global context is below.

GLOBAL CRUDE PRICING AND BENCHMARKS

There are approximately 550 global crude oil streams that

can be identified as individual grades with a multiplicity of

qualities and prices. Only a handful of those grades can be

called ‘benchmark’ or ‘marker’ grades. The remainder of crude

oils price as differentials to those few key benchmarks. With

the launch of ICE ASCI™ futures, ICE is able to offer ASCI

index sour crude outright and differential futures alongside

the two key global light, sweet crude futures benchmarks –

West Texas Intermediate (WTI) and Brent - for the first time.

Combined, ICE’s offering allows players to hedge and trade

these contracts as outrights and as differentials to each other,

representing a full spectrum of marker grades relevant to U.S.-

based crude pricing.

ICE ARGUS SOUR CRUDE INDEX (“ASCI”)

ICE now offers 4 U.S. Gulf-related sour crude products to

oil market participants globally, including:

•TwoICEOTCArgus Sour Crude Index (“ASCI”) sour crude

differential swaps (on a Calendar Month and Trade Month

basis), and

•Two ICE Argus Sour Crude Index (“ASCI”) Futures (one

outright, one differential)

www.argusmedia.com/methodology

GLOBAL PRICING, GLOBAL OIL FLOWS

Oil as a commodity is produced, transported, and refined all over the world. Figure 1 illustrates many of these key flows, and their

relative size.

THE WORLD’S TWO LARGEST CRUDE

BENCHMARKS ARE SWEET GRADES, BUT

THERE’S A GROWING AMOUNT OF SOUR

CRUDE TO PRICE

Crude oil can be described in terms of each

grade’s key characteristics as a hydrocarbon,

each of which influences the economic yield

of that grade in terms of the refined products

that flow from that grade, in addition to where

it is located. Terms like ‘light’, ‘sweet’ and

‘sour’ are used. WTI and Brent, the two most

important global crude benchmarks are ‘light

and sweet’, whereas most of the world’s total

crude production, including the ASCI index

component grades (such as Mars, Poseidon

and Southern Green Canyon, see below) are

more sour and ‘heavier’ than Brent and WTI, meaning that they are denser and are higher in sulphur by-product, generally making

them less valuable in terms of the products produced in the refining operation. However, much of U.S. Gulf refining capacity has

become well adapted to processing the heavier, more sour grades, and can thus use sour grades that are produced in the U.S.

Gulf or imported from global locales such as the Arab Gulf. As a result, these refiners are able to capture the discounted prices

for sour crudes, relative to lighter, sweeter – and more expensive - grades like WTI and Brent.

For more than twenty years, Brent has been

the dominant global physical marker crude.

West Texas Intermediate, also a light, sweet

grade, has been the central price hub for

crude oil within North America, although

most of the light, sweet crude being imported

is also priced using the North-Sea produced

Brent grade. Brent prices, by reference,

approximately two thirds of all global physical

crude oil produced. Figure 2 below outlines

various crude markers globally and their price

relationship to Brent:

THE U.S. GULF SOUR CRUDE MARKET

The U.S. Gulf is a key region for the U.S. oil industry, providing at least one-third of U.S. domestic oil production, and containing

around half of U.S. refining capacity (see Figure 3 below). It is logical that U.S. pricing should overlay its key infrastructure. The

ASCI index - and pricing against it - represents such an alignment.

ICE ARGUS SOUR CRUDE INDEX (“ASCI”) 2

USCanadaMexicoS. & Cent. AmericaEurope & EurasiaMiddle EastAfrica Asia Pacific

20.0

99

49.5

32.6

119.7

90.9

25.2

53.121.4

238.3

20.0

22.4

20.7

43.424.4

64.7

119.4

39.1

44.5

23.8

25.4

21.7

101.3

127.6

318.5

196.9

92.0

107.6

49 2

38.0

FIGURE 1: MAJOR OIL TRADE MOVEMENTS

Source: BP Statistical Review of World Energy 2009

FIGURE 2: THE BRENT CRUDE FUTURES CONTRACT: BRENT RELATED PRICING WORLDWIDE


U.S. sour crude production has risen sharply

over the past few years, boosting interest

in a U.S. Gulf Coast Sour Crude Index. The

increase in oil production in the U.S. Gulf more

specifically has led to a surge in spot market

trading volumes. U.S. Gulf output of about 1.2

million b/d in 2009 is expected to climb to 1.4

million b/d in 2010 and 1.9 million b/d in 2013.

According to the U.S. Department of Energy,

around 7.5 million b/d of crude oil originating

from countries with predominantly sour

crude production were imported in 2008 (see

Figure 4 below). This represents close to 75%

of the total average daily U.S. crude imports of approximately 9.7 million b/d (2008). Many of the refiners located in the U.S. Gulf

Coast region have a high degree of upgrading and processing capacity and therefore are specialists in refining sour crude oil.

U.S. Gulf Coast refiners have also increasingly invested in coking facilities which break down residual oils into lighter and lower

sulphur products.

WTI PRICE DISCONNECTION VERSUS OTHER DOMESTIC SWEET AND SOUR CRUDES AND BRENT – THE FEBRUARY 2009

DISRUPTION & PRICING ISSUES FOR THE INDUSTRY

In addition to a greater reliance on U.S. Gulf Coast sour crude, the existing predominant U.S. benchmark – WTI – has experienced

significant dislocation from other major global oil markers over the past several years (see Figure 5). Industry participants

increasingly express concerns over WTI’s physical infrastructure, its delivery and flow constraints, and major storage location in

Cushing, Oklahoma.

In part, as a result of these factors, in November 2009, Saudi Aramco announced plans to stop pricing its output relative to

WTI and begin pricing relative to the ASCI index for January 2010 crude imports to the U.S. Gulf. Much of the momentum for

the Saudi announcement and industry disquiet stemmed from the dislocation of WTI prices from both U.S. domestic and other

international marker grades in 2008 and repeated most dramatically in February 2009.

3

FIGURE 3: U.S. PETROLEUM REFINERY CAPACITY, BY REGION CRUDE OIL DISTILLATION

FIGURE 4: U.S. GULF SOUR CRUDE IMPORTS BY COUNTRY AND VOLUME

Source: Petroleum Supply Annual, Table 36, Biennial Refinery Report

Source: U.S. Department of Energy


So what happened early in 2009? Following are some of the points raised by industry commentators:

• TheCushingdeliverylocationforWTIisapipelinenexus,withnoproximitytoU.S.Gulfrefiners

• Aself-feeding‘reinforcingfeedback’oflocalstoragebuiltup,doublingbetweenDecember’08andMarch‘09(Adding30+

mil/bbl) to exploit contango price arbitrage available in the market

• Thiswasalliedtoadefactoone-way‘lock-in’effectofpipelineinlandflownorthoutoftheU.S.GulftoCushingandtowards

the Chicago-based refineries – creating a ‘cash & carry’ arbitrage supply loop as U.S. Gulf – Cushing effectively became

disconnected, even within the United States, in price terms

• Early2009sawextremevolatilityofWTIfrontmonthlyspreads,pullingfirstlineflatpricesdown

• Thedepthofcontangooverallandtheallied

instability of term structure became widely

problematic for many market participants

• Collectively, these factors led to WTI

decoupling from other U.S. & international

crude grades, with Mars (effectively close

to the ASCI index number) $3/bbl above,

rather than below WTI. Louisiana Light

Sweet (LLS), a comparable light sweet

crude located in the U.S. Gulf, was as much

as $9.90/bbl above WTI, and a $11.56/bbl

positive differential for Brent was seen,

compared to the more normal $1.00-$1.50/

bbl negative differential

While WTI remains the underlying reference base for ASCI index related sour crude differentials, a possibility exists that the

outright ASCI index price may become more independent of its WTI base, especially if the differentials to WTI continue to be

less stable than the differentials to more globally-traded markers such as Brent.

WHY DOES THE SAUDI PRICING CHANGE MATTER TO THE U.S. OIL MARKETS?

Saudi (generally sour) crude oil forms a large part of the total crude imported into the United States (see imported proportions

in Figure 4 above). Together with the price of WTI (as long as sour crudes continue to be priced in this way), differentials will

continue to be an important part of the overall price of crude oil, ultimately affecting the price products such as heating oil and

gasoline for the U.S. consumer.

Other Arab Gulf producers regard Saudi Arabia as the key bellwether for OPEC decisions, and frequently fall into line behind

Saudi decisions and practice. Saudi Arabia’s break with WTI pricing reinforces the views of some that using sour crude contracts

for pricing sours into the United States is a better mechanism than using WTI futures, whatever the latter’s liquidity, especially

given WTI’s recent dislocations.

This change will likely have knock-on effects for pricing by the very influential Arab Gulf producers, and for the treatment of

other sour crudes such as Urals and Dubai. It may also contribute to Brent becoming even more dominant in global (light sweet)

physical pricing, as WTI’s status in the U.S. is bifurcated by an increasingly independent ASCI index marker. It is likely that OPEC

production will increase in the future, as will Canadian heavy output, especially from unconventional sources such as from oil

shale and oil sands, likely rendering sour crudes an even more important component of the global crude market. The ASCI index

will give importers an identifiable and independent marker for differentials when setting their Official Selling Prices (OSPs), and

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FIGURE 5: BENCHMARK CORRELATION IN 2008/2009: WTI DIVERGENCE FROM BRENT AND DUBAI (First monthly spread)


reduce the need for ad hoc proxy calculations between importers and their customers when WTI fundamentals dislocate.

WHAT IS AN OSP?

OSP stands for Official Selling Price and is the mechanism that the majority of the Middle Eastern producers use to sell their

crude oil. This is generally set on a monthly basis and the producer will use a variety of similar crude price references to calculate

the OSP. In the case of the Saudis, they will generally use the prices of Mars, Venezuelan and Iraqi Basrah Light as a guide for

setting the OSP.

THE ASCI INDEX SOLUTION

Given the growing criticism of WTI as a ‘broken’ benchmark, and the need for both suppliers and customers to negotiate pricing

differentials to WTI, participants have been looking for alternative U.S. benchmarks. As a result, the Argus index, was created to

provide a potential alternative for establishing such differentials (Figure 6).

1. What is the ASCI index?

The ASCI index is a single price for a basket of three crudes – Mars, Southern Green Canyon and Poseidon. Prices are

compiled by Argus from their office in Houston. The ASCI index is published as a differential to WTI and as a flat price.

2. How is the ASCI index calculated?

The Argus Sour Crude Index (“ASCI”) is a trade weighted index using trades in the underlying three grades – Mars, Southern

Green Canyon and Poseidon. The WTI component, to which the differential is added, is assessed at 14:30 EST. The differentials

continue to be assessed up to and including 16:00 EST with the final price published by 18:00 EST.

ASCI INDEX COMPONENT SOUR CRUDE

GRADES

Three physical grades are used in the

compilation of the Argus Sour Crude Index

(“ASCI”). This helps to enhance its robustness

for deriving an effective settlement price on

which to base a futures [or over-the-counter

swaps] market. The three grades, Mars,

Poseidon and Southern Green Canyon have a

combined daily production of close to 1 million

b/d with spot trade regularly exceeding 50%

of the total daily production, according to

Argus. The Argus Sour Crude spot market

trade is 7 times larger than the equivalent

for Dubai and almost double the size of both

Urals markets combined (Source: Argus ASCI

White Paper).

• Mars: Mars is the crude stream with the highest volume of the three grades, producing around 350,000 b/d in September

2009 according to the field operator website www.marscrude.com. The blend primarily comes from the Mars field, which is

operated by Shell with BP as a minority partner. The other field in the system is called Ursa and is also operated by Shell with

BP, ExxonMobil and Conoco as minority partners. The Mars field, which lies in the Gulf of Mexico about 130 miles southeast

of New Orleans, is connected via the Equilon-operated pipeline to the Clovelly storage facility that is part of the Louisiana

Offshore Oil Port (LOOP).

5

FIGURE 6: HISTORICAL PRICING DATA FOR ASCI VERSUS WTI AS A DIFFERENTIAL

Source: Argus


• Southern Green Canyon: Daily volumes are estimated to be around 230,000 b/d with the largest share coming from the

Atlantis field, according to the website www.cameronhighwayoil.com). The Atlantis field is operated by BP with BHP Billiton

as a significant equity holder. The other fields in the system include Holstein and Mad Dog (100,000 b/d). Output from the

Atlantis, Holstein and Mad Dog fields is shipped via the Cesar Oil pipeline, operated by the Mardi Gras Transportation system,

to the Cameron Highway Offshore Oil Pipeline system which will transport the oil to the Gulf Coast refineries.

• Poseidon: Production currently stands at about 225,000 b/d. Like the Mars and Southern Green Canyon fields, Poseidon is a

pipeline network. Enterprise Products Partners have a 36% share, as do Shell Pipeline Company. Marathon has a 28% stake in

the field.

WHAT TYPE OF PRICING IS RELEVANT TO AND CAPTURED BY THE ASCI INDEX, AND WHAT TYPE OF TRANSACTIONS ARE

LIKELY IN ASCI INDEX RELATED PRODUCTS?

It is likely that market participants may trade and hedge around the 5 or 10 day pricing and trading windows for monthly OSP-

related Arab Gulf, imported cargoes into the U.S. Gulf for dates around the 25th-30th of each month or between the 25th and

the 5th of the following month in calendar terms. (These represent the first 5 or 10 days of a trade month, by which the physical

nominations to move landed crude by inland pipeline are organized).

It is possible that increasingly flexible contract terms may become more common as importers and refiners use more monthly

average pattern contracts (popular elsewhere in oil markets), which will appeal to many refiners, as it reduces price volatility and

increases logistical and price options. If other Arab Gulf countries such as Kuwait, and more openly-traded Iraqi grades follow

suit, interest will increase further in ASCI index outrights and differentially-traded pricing.

Inter-month spreads in either OTC markets or futures differential and outright contracts will allow hedgers to move their price

exposure along the timing curve as their physical requirements change. These contracts will also enable traders to take a view on

price evolution in relative domestic sweet/sour differentials at different points along the forward price curve, and also in relation

to such global sweet markers as Brent.

Trading against the outright future or differential can also allow market participants to take a view on outright sour crude prices

in a key production, refining and import region of the United States, and a sweet/sour differential which marks one of the major

global spreads of its type. Sweet/sour spreads represent a play on the input costs of simple against complex refining, and of the

likely output levels of OPEC heavier, more sour crudes against other sections of global crude output. In short, many key refining

and production margins are available through such instruments and related WTI and Brent products.

TRADING IN ICE ARGUS SOUR CRUDE INDEX

(“ASCI”) FUTURES AND OTC SWAPS

1. Outright: The ICE Argus Sour Crude Index

(“ASCI”) future allows market participants

to hedge or trade around the outright flat

price of a representative basket of U.S. Gulf

sour crudes. Participants will be able to

match the exposure of U.S. Gulf-produced

or U.S. Gulf-delivered sour crudes with a

single instrument (Figure 7).

2. Inter-commodity spreading: The ICE

6

FIGURE 7: ASCI INDEX (Outright)

Source: Argus


Argus Sour Crude Index (“ASCI”) Differential Future and ASCI Index Differential OTC Swaps represent a first order inter-

commodity quality spread, a direct spread between U.S. Gulf sour crude prices and Mid-continent WTI light sweet crude

prices (see Figure 8 below). These can be traded on ICE in an OTC swap form as differentials over a calendar month period,

or as trade months, with the ’bullet’ differential future providing such pricing and trading facility in a futures environment.

3. The ICE Argus Sour Crude Index (“ASCI”)

Future versus ICE Brent Future as a flat price

against a flat price will also represent an

additional global sweet/sour differential to

be traded in any single maturity, or via boxes

to be traded or hedged against ICE Brent

across any chosen part of these two crude

benchmarks’ respective forward curves.

4. Intermonth spreading: ICE Argus Sour

Crude Index (“ASCI”) intermonth spreads

in the ICE Argus Sour Crude Index (“ASCI”)

Differential Future will enable participants to

trade around their forward view of how this

important sweet/sour differential will evolve

in price terms, which can be affected by:

a. global fundamental factors in oil, the overall economic outlook,

b. the proportion of OPEC (sourer) crudes within the overall crude production picture,

c. the relative demand for light-end against middle-distillate products,

d. the quantity of oil in storage, and

e. the relative fundamentals of the U.S. Gulf against Mid-continental conditions, among others, at different points in time.

WHAT ARE THE IMPLICATIONS OF THESE CHANGES FOR THE BRENT MARKET?

As third-party commentators have said, the ASCI index does not offer a threat to ICE Brent as the leading global physical light,

sweet crude marker price. Although Brent is a light, sweet crude, unlike WTI, Brent has a number of factors that differentiate it

from WTI to make it a uniquely successful global benchmark:

Brent is a seaborne, globally traded and referenced physical crude. Because WTI cannot be traded and transported outside of

the United States, WTI cannot truly reflect global underlying physical fundamentals as efficiently.

Additional jurisdictions, such as Australia, are increasingly using Brent as a pricing reference, particularly in Asia.

Physical Brent is closer to the ASCI index component grades in specification than WTI, and as a stream has become more sour

as the Buzzard field has been added to Forties, forming part of the wider Brent complex.

ICE Brent already trades on a differential basis to Dubai, the most popular sour crude marker in Asia, and there is every reason

to expect ASCI index instruments to also trade and price in reference to ICE Brent in a similar manner. The two sweet/sour

differentials: ICE Brent/Dubai and ICE Brent/ASCI index may well compete to be the dominant global sweet/sour differential, as

they represent key pricing ‘bridges’ globally.

The following charts (Figure 9 and Figure 10), together with Figure 5 above, demonstrate that Brent’s pricing behavior has

7

FIGURE 8: ARGUS SOUR CRUDE INDEX vs WTI


remained within expected norms against key global references, while WTI has periodically disconnected. Figures 9 and 10 also

show Brent’s relative price stability, and price ‘bridge’ status between WTI and the U.S. Gulf sour crudes. Arguably ship borne

Brent is often more closely correlated with U.S. Gulf sours than their U.S. light sweet equivalent, WTI, which is of relevance when

an increasing proportion of the sour crude volume is being priced in terms of ship borne, imported, and hence internationally-

traded crude.

8

FIGURE 9: ASCI INDEX CORRELATIONS - BRENT, WTI & WTI (Mars as Proxy)

FIGURE 10: ASCI INDEX CORRELATIONS - BRENT, WTI & WTI (5-day av. prices and trend)


SUMMARY

THE ICE ARGUS SOUR CRUDE INDEX (“ASCI”) PRODUCT RANGE

• ICEArgus Sour Crude Index (“ASCI”) Futures Contract Specifications

https://www.theice.com/productguide/ProductDetails.shtml?specId=1428

• ICEArgus Sour Crude Index (“ASCI”) Differential Futures Contract Specifications


• ICEArgus Sour Crude Index (“ASCI”) Differential Trade Month Swap Specifications


• ICEArgus Sour Crude Index (“ASCI”) Differential Calendar Month Swap Specifications


ICE ARGUS SOUR CRUDE INDEX (“ASCI”) FUTURES AND DIFFERENTIAL FUTURES

ICE launched the ICE Argus Sour Crude Index (“ASCI”) Futures Contracts to:

• CreatealiquidsourcrudebenchmarktocomplimentitsexistingICEBrentandICEWTIFuturescontracts.Thiswillprovide

participants with the opportunity to access some of the most liquid global oil grades in a single electronic marketplace;

• FacilitatetradingintheASCI index/Brent and ASCI index/WTI Futures spreads;

• ProvidemarketparticipantsmarginoffsetswherepossiblebetweentheICEBrentCrudeFuturescontract,theICEWTICrude

Futures contract and the ICE Argus Sour Crude Index (“ASCI”) Futures contract; and

• AllowmarketparticipantstomanageexposuretoeitherthedifferentialtoWTIortheflatprice.

Only ICE can offer both ASCI index futures (outright and differential) alongside WTI and Brent futures via a single electronic

platform. The four futures combined allow multiple trading and hedging opportunities in the three key grades of crude oil, as well

as spreading across grades and time periods.

Details of each of the ICE Argus Sour Crude Index (“ASCI”) products are available via the following links:

ICE Argus Sour Crude Index (“ASCI”) Differential OTC Swaps

In addition to the two ICE Argus Sour Crude Index (“ASCI”) futures, ICE also offer cleared differential swaps against the ASCI

index differential (to WTI) in both calendar month and trade month tenors.

These allow trades and hedgers of ASCI index related sour crudes to:

• HedgeandtradearoundASCI index related differentials in either calendar month or trade month pattern;

• Matchcurrentorfuturephysicalcontracttermsastheyseefit;

• Utilize logical margin offsets against other relevant OTC markets such as WTI first-line swaps, Brent and Brent/Dubai

instruments to maximize capital efficiency

ICE Clearing

Summary of ICE OTC Cleared Oil and other energy products:

• ICEoffersover100clearedOTCoilproductsacrossallmajorglobalcrudesandrefinedproductsinbothoutrightformandas

differentials. Please use the following link to reach a full list of ICE cleared OTC oil products

More ICE Crude Oil and Refined Products

9





https://www.theice.com/productguide/ProductGroupHierarchy.shtml?groupDetail=&group.groupId=18


ICE OTC CLEARING: WHY AND HOW?

Elimination of Counterparty Risk

• OTCclearingvirtuallyeliminatescounterpartyriskassociatedwithtraditionalbilateraltrades.Theclearinghouseactsasa

central counterparty for all trades. Clearing gives market participants the security of futures transactions with the flexibility of

OTC markets

• Marginingremovesthedailyrigorofbackofficeprocessesassociatedwithbilateraltradesvialettersofcredit.Itoutsources

collateralization to a guaranteed and financially secure third party

• Bycarryingbothsidesofthetransaction,thesystemicriskisnaturallydiversified,whileconservativevolatility-basedmargining

provided by the clearing house creates security for all involved

Increased trading opportunities

• Deferring to cleared business eliminates operational distractions and complexity related to bilateral credit issues around

trading and hedging

• ParticipantsbenefitfromthefactthatOTCtradesarecentrallycleared,freeingtheuseofbilateralcreditlines-openingupa

larger and broader universe of market participants, including those who might otherwise be excluded

Efficient capital flows

• Clearingsatisfiesincreasinglyrigorouscapitalrequirementsplaceduponmarketparticipantsbyregulatorsandpolicymakers

• Atraderwhohasreachedhisowndesklimitsincapitalterms,butwhoseesapromisingtradingopportunity,canaddadditional

exposure with no further credit exposure, if the marginal OTC position is sent for clearing, rather than added to a bank’s or

trading firm’s own net credit position

Streamlining back office operations

• Offsetsbetweenexchange-tradedandbilateralOTC instruments to a single clearinghouseallow reducedcapital reserve

requirements and margin, reduced confirmation errors, and other back office bottlenecks

• Clearingprovidessettlementvalues,aidingpricediscoveryandriskmonitoringviaobjectivefair-valuemark-to-marketforOTC

markets

• Thepostingofinitialandvariationmarginthroughclearinghousesensuresadegreeofsecurityofperformanceandpayment

that cannot be matched by even the most highly secure single counterparties in the bilateral OTC trading realm

WHY CLEAR WITH ICE?

Global market synergies

• IfacustomeristradingICEoilfuturessuchasBrent,WTIandGasoil,itmakessensetoalsoclearstronglycorrelatedinstruments

offering related OTC bilateral exposure to such global benchmarks through the same clearing house and thus get the benefit

of direct cross-margining and offsets across screen-traded and bilateral markets, for the most efficient and operationally

simple employment of capital in trading and hedging energy

• CompaniesactivelytradingtheenergycomplexacrossdiversederivativeproductsinBrent,WTI,Gas[oil]andEmissionswill

significantly benefit from related efficiencies across trade capture, confirmation, margining and reconciliation

State of-the-art cross-margining optimizes capital efficiency

• Marginoffsetsbetweenscreen-tradedfuturesandbilaterallymatchedOTCmarketsofupto95%areavailabletoICEClear

customers in markets such as oil inter-commodity spreads

• BackofficeprocessesaresimplifiedandreconciliationseasiertoprocessviaasingleclearinghousethathandlesICEon-screen

execution and clearing of related OTC instruments

10


Rational margins

• ICE’ssettlementcurvesusedformarginingsuchbilateralinstrumentsareindependentlyanddirectlysourcedfromapoolof

established major trading entities, and considered highly reliable for margining purposes establishing true fair value

CONCLUSION

The decision to switch pricing to the ASCI index by such a significant U.S. Gulf importer likely marks a period of increasing

reflection and uncertainty for U.S. domestic crude pricing, especially of sour crudes of the type that comprise the ASCI index.

WTI remains the major U.S. domestic light sweet benchmark, and a key underpinning of the ASCI index. Brent continues to grow

in significance as the most common international physical crude benchmark, and is continuing to enhance its significance in

pricing.

The ICE Argus Sour Crude Index (“ASCI”) product offering allows traders and hedgers in any and all of these markets to access

all, and intervening spreads and differentials at a single point of delivery, and to maximize clearing, processing and capital

efficiencies through one provider.

11

US: Jeff Barbuto

+16467335014

[email protected]

US: Yvonne Betts

+1713.890.1224

[email protected]

Europe: Paul Wightman

+44(0)2070657744

[email protected]

Europe: Deborah Pratt

+44(0)2070657734

[email protected]

Asia: Jennifer Ilkiw

+6565940161

[email protected]

Asia: Julius Foo

+6565940162

[email protected]

For more information please contact:

mailto:[email protected]







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ICE Markets which is authorized and regulated by the Financial Services

Authority as an arranger of deals in investments and agency broker.

ICE OTC REGULATION

ICE operates its OTC electronic platform as an exempt commercial

market under the Commodity Exchange Act and regulations of the

Commodity Futures Trading Commission, (CFTC). The CFTC generally

oversees the trading of OTC derivative contracts on the ICE platform.

All ICE participants must qualify as eligible commercial entities, as

defined by the Commodity Exchange Act, and each participant must

trade for its own account, as a principal.

As an exempt commercial market, ICE is required to comply with the

access, reporting and record-keeping requirements of the CFTC. ICE’s

OTC business is not otherwise subject to substantive regulation by

the CFTC or other U.S. regulatory authorities. Both the CFTC and the

Federal Energy Regulatory Commission have view-only access to the

ICE trading screens on a real-time basis.

GETTING INVOLVED

To learn more about ICE markets, products, and services, view a list of

ICE Education programs or download a copy of the ICE capabilities

brochure. To contact ICE, choose from a complete list of ICE contacts

or call ICE Futures Europe.

A complete list of specifications is available at: https://www.theice.

com/productguide/productDetails.action?specId=909

This brochure serves as an overview of the Brent and WTI futures and options markets of ICE Futures Europe. Examples and descriptions are designed

to foster a better understanding of the Brent and WTI crude oil futures and options market. The examples and descriptions are not intended to serve as

investment advice and cannot be the basis for any claim. While every effort has been made to ensure accuracy of the content, ICE Futures Europe does

not guarantee its accuracy, or completeness or that any particular trading result can be achieved. ICE Futures Europe cannot be held liable for errors

or omissions in the content of the brochure. Futures and options trading involves risk and is not suitable for everyone. Trading on ICE Futures Europe is

governed by specific rules and regulations set forth by the Exchange. These rules are subject to change. For more detailed information and specifications

on any of the products traded on ICE Futures Europe, contact ICE Futures Europe or a licensed broker.

IntercontinentalExchange is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union and the United States. ICE

is a Registered Trademark and Marque Deposees of IntercontinentalExchange, Inc., registered in Canada, the European Union, Singapore and the

United States. ICE Futures U.S. and ICE Futures Europe are Registered Trademarks of IntercontinentalExchange, Inc., registered in Singapore and the

United States. ICE Clear U.S. is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union, Singapore and the United

States. Russell 1000 is a Registered Trademark of the Frank Russell Company. U.S. Dollar Index is a Registered Trademark of ICE Futures U.S., Inc.,

registered in the United States. USDX is a Registered Trademark of ICE Futures U.S., Inc., registered in Japan and the United States.

“Argus”, “Argus Sour Crude Index” and “ASCI” are trade marks of Argus Media Limited and are used under license. All intellectual property rights in

the Argus indices referred to herein belong to Argus Media. Argus Media accepts no liability to third parties arising from or in connection with any

use of the Argus indices.

12

web theice.com | telephone +44(0)2070657700

www.theice.com

https://www.theice.com/productguide/productDetails.action?specId=909

https://www.theice.com/productguide/productDetails.action?specId=909

FREQUENTLY ASKEDQUESTIONS


with ICE

WHAT CONTRACTS IS ICE LAUNCHING?

ICE is offering two futures and two cleared over-the-counter (OTC) contracts to help customers manage exposure to sour crude

using the Argus Sour Crude Index (“ASCI”). The new futures contracts are the ICE Argus Sour Crude Index (“ASCI”) Future, which

is an outright contract, and the ICE Argus Sour Crude Index (“ASCI”) Differential Future, which is the differential between the

ASCI index and the West Texas Intermediate (WTI) price. Both contracts will expire on the same day as the ICE WTI contract. The

two new cleared OTC contracts are an ASCI index based differential calendar swap contract and an ASCI index based differential

trade-month swap contract. Contract specifications are available at: www.theice.com

WHAT CRUDE GRADES ARE USED IN THE INDEX?

The ASCI index is comprised of three priced crude grades: Mars, Southern Green Canyon and Poseidon. Total U.S. Gulf production

is currently estimated to be about 1.2 million b/d, increasing to 1.4 million b/d in 2010 and 1.9milllion b/d in 2013.

WHY IS ICE LAUNCHING U.S. GULF SOUR CRUDE CONTRACTS?

ICE is offering a range of risk management tools to help market participants manage spreads between WTI and sour crude

grades in the Gulf of Mexico, as well as outright and flat prices. Recent volatility in WTI-sour crude spreads has prompted both

refiners and producers to consider more effective risk management tools to reduce exposure to price swings. Limited storage at

Cushing, Oklahoma (the delivery location for WTI futures), along with pipeline bottlenecks, have contributed to very large swings

in the relative prices of comparable crude grades at Cushing and on the U.S. Gulf Coast.

HOW DOES THE MARKET TRADE SOUR CRUDE NOW? WHAT PROBLEM DOES AN ASCI INDEX CONTRACT HELP SOLVE?

A significant volume of sour crude grades delivered in the U.S. Gulf — whether imported or domestically produced — is priced on

a WTI-basis, plus or minus a grade-based differential. A differential contract allows customers to manage the spread between the

WTI price and the delivered Gulf Coast crude price. An outright contract allows traders to hedge using a flat-price benchmark.

FREQUENTLY-ASKED QUESTIONS

U.S. GULF OF MEXICO INFRASTRUCTURE

Source: Argus


www.theice.com

ICE ARGUS SOUR CRUDE INDEX (“ASCI”) - FAQs

WHY TRADE THE ASCI INDEX ON ICE?

ICE is the only venue offering three major crude benchmarks on the same platform. ICE Brent, ICE WTI and ICE Argus Sour Crude

Index (“ASCI”) futures will all be listed on a single platform, with margin offsets offered between all three contracts to maximize

capital efficiencies.

HOW WOULD THE ASCI INDEX BE IMPACTED BY THE U.S. HURRICANE SEASON?

While it is difficult to predict any weather-related impact on commodity prices, the inclusion of three distinct crude oil grades

in the ASCI index price is a mitigating factor against price volatility associated with storm-related events. In the event that a

hurricane affected production at one of the ASCI index grade fields, the index could still be produced, and the impact on price

levels would be general rather than specific to the U.S. Gulf Coast.

WHAT ARE PRODUCERS’ CONCERNS ABOUT WTI?

Because all three ASCI index component grades are medium sour — higher in sulphur than light, sweet WTI — they would

typically trade at a discount to WTI. In the first quarter of 2009, however, Mars, Poseidon and Southern Green Canyon all traded

at significant premiums to WTI: Over a period of two months, U.S. Gulf Coast crude differentials to WTI moved from around -$8/

bblto+$8/bbl.ThisvolatilitybetweenthepriceofsourU.S.GulfcrudeandWTIpromptedproducerssuchasSaudiArabiato

announce that future oil sales will be priced against the ASCI index. Selling oil based on a basket of U.S. Gulf Coast sour crude

grades removes some of the issues associated with the inland WTI, especially if the WTI underlying base again dislocates against

other U.S. Gulf Coast crude grades.

DOES THIS MEAN THE END OF WTI AS A BENCHMARK?

The components of the Argus Sour Crude Index (“ASCI”) price trade relative to WTI in the spot market. Any future correlation

disruptions of inland markers like WTI and U.S. Gulf prices will reinforce the independence of the ASCI index flat price through

its differentials to WTI. As a physical benchmark, WTI has experienced many well-documented issues for some time, and as WTI

production falls, it is becoming less representative of U.S. Gulf Coast deliveries, which tend to be sour. In general, the overall crude

slate is becoming more sour and heavier in quality, and therefore the ASCI index flat price could become less correlated with WTI

over time, with more volatility in the differentials.

2

PRICING DIFFERENTIALS: WTI TO ASCI INDEX CRUDES ASCI CORRELATIONS: BRENT, WTI & ASCI INDEX (MARS AS PROXY)

The graph above demonstrates how well correlated Brent is with Mars, compared

to WTI, despite also being light, sweet crude. Source: Argus Media LimitedSource: Argus Media Limited

ICE ARGUS SOUR CRUDE INDEX (“ASCI”) - FAQs

COSTS TO TRADE

WHAT ARE THE COSTS FOR TRADING ICE ASCI™ FUTURES AND SWAPS?

For ASCI index futures, a standard $0.73 per lot per side fee will apply, with $1.23 per lot per side applying to Blocks, EFPs and

EFSs. A $0.09 per lot clearing fee will be charged.

For OTC swaps, the exchange will charge $1.25 per lot for the ASCI Index Differential Calendar swap (TAB) and the Differential

Trade Month swap (TOB) for blocking. A clearing fee of $0.09 per lot also will be charged.

WILL THERE BE A FEE WAIVER?

Fee waiver details will be announced in the near future.

WHAT WILL THE MARGINS BE?

For the latest on margin rates for cleared OTC and futures contracts please see our website at:

https://www.theice.com/clear_europe_span_parameters.jhtml

3

This brochure serves as an overview of the Brent and WTI futures and options markets of ICE Futures Europe. Examples and descriptions are designed

to foster a better understanding of the Brent and WTI crude oil futures and options market. The examples and descriptions are not intended to serve as

investment advice and cannot be the basis for any claim. While every effort has been made to ensure accuracy of the content, ICE Futures Europe does

not guarantee its accuracy, or completeness or that any particular trading result can be achieved. ICE Futures Europe cannot be held liable for errors

or omissions in the content of the brochure. Futures and options trading involves risk and is not suitable for everyone. Trading on ICE Futures Europe is

governed by specific rules and regulations set forth by the Exchange. These rules are subject to change. For more detailed information and specifications

on any of the products traded on ICE Futures Europe, contact ICE Futures Europe or a licensed broker.

IntercontinentalExchange is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union and the United States. ICE

is a Registered Trademark and Marque Deposees of IntercontinentalExchange, Inc., registered in Canada, the European Union, Singapore and the

United States. ICE Futures U.S. and ICE Futures Europe are Registered Trademarks of IntercontinentalExchange, Inc., registered in Singapore and the

United States. ICE Clear U.S. is a Registered Trademark of IntercontinentalExchange, Inc., registered in the European Union, Singapore and the United

States. Russell 1000 is a Registered Trademark of the Frank Russell Company. U.S. Dollar Index is a Registered Trademark of ICE Futures U.S., Inc.,

registered in the United States. USDX is a Registered Trademark of ICE Futures U.S., Inc., registered in Japan and the United States.

“Argus”, “Argus Sour Crude Index” and “ASCI” are trade marks of Argus Media Limited and are used under license. All intellectual property rights in

the Argus indices referred to herein belong to Argus Media. Argus Media accepts no liability to third parties arising from or in connection with any

use of the Argus indices.

web theice.com | telephone +44(0)2070657700

US: Jeff Barbuto

+16467335014

[email protected]

US: Yvonne Betts

+1713.890.1224

[email protected]

Europe: Paul Wightman

+44(0)2070657744

[email protected]

Europe: Deborah Pratt

+44(0)2070657734

[email protected]

Asia: Jennifer Ilkiw

+6565940161

[email protected]

Asia: Julius Foo

+6565940162

[email protected]

For more information please contact:

https://www.theice.com/clear_europe_span_parameters.jhtml







SPEC SHEETS


with ICE

ICE

OT

CICE OTC

Nov 30, 2009

Argus Sour Crude Index (ASCI) Diff Calendar Swap

Contract Specifications

A monthly cash settled calendar diff swap based on the Argus Sour Crude Index (ASCI)

Description

1,000 BarrelsContract Size

Any multiple of 1000 BarrelsUnits of Trading

Minimum Screen Order: 1 lotMinimum Block Order: 1 lot

Minimum Trading Size

US Dollars and centsCurrency

One tenth of one cent ($0.001) per BarrelFinal Settlement

ICE Block: One cent ($0.01) per US barrelICE Screen: One cent ($0.01) per US barrel

Minimum Price Flux

$10.00 per lotTick Size

First Business Day following the settlement periodLast Trading Day

The traded price or the previous day's settlement priceFixed Price

In respect of daily settlement, the Floating Price will be determined by ICE using price data from a number of sources including spot, forward and derivative markets for both physical and financial products.

Daily Settlement

In respect of final settlement, the Floating Price will be a price in USD per Barrel based on the average of the price quotations appearing in the 'Argus Crude' report under the heading 'Argus Sour Crude Index' for 'ASCI-Weighted Diff' for each day during the settlement period.

Floating Price

Up to 48 consecutive months will be listed commencing with the next calendar month. An additional year will be

Contract Series

ICE Help Desk: Atlanta + 1 770 738 2101, London + 44 (0) 20 7488 5100 or [email protected]


added expiry of the November contract. Quarterly and calendar tenors will be listed within the total number of listed monthly contract

One business day following the Last Trading Day.Payment Dates

US Business DaysBusiness Days


TABLogical Code

ICE

OT

CICE OTC

Nov 30, 2009

Argus Sour Crude Index (ASCI) Diff Trade-Month Swap


A monthly cash settled Trade Month swap based on the Argus Sour Crude Index (ASCI)

Description

1,000 BarrelsContract Size

Any multiple of 1000 BarrelsUnits of Trading

Minimum Screen Order: 1 lotMinimum Block Order: 1 lot

Minimum Trading Size

US Dollars and centsCurrency

One tenth of one cent ($0.001) per BarrelFinal Settlement

ICE Block: One cent ($0.01) per US barrelICE Screen: One cent ($0.01) per US barrel

Minimum Price Flux

$10.00 per lotTick Size

First Business Day following the settlement periodLast Trading Day

The traded price or the previous day's settlement priceFixed Price

In respect of daily settlement, the Floating Price will be determined by ICE using price data from a number of sources including spot, forward and derivative markets for both physical and financial products.

Daily Settlement

In respect of final settlement, the Floating Price will be a price in USD per Barrel based on the average of the price quotations appearing in the 'Argus Crude' report under the heading 'Argus Sour Crude Index' for 'ASCI-Weighted Diff' for each day that it is determined during the Trade month. The Trade Month begins with the first business day after the 25th calendar day two months prior to the contract month through the last day that falls on or before the 25th

Floating Price



calendar day of the month prior to the contract month. If the 25th calendar day is a weekend or a holiday, the Trade month period shall end on the first business day prior to the 25th calendar day.

Up to 48 consecutive months will be listed commencing with the next calendar month. An additional year will be added expiry of the November contract. Quarterly and calendar tenors will be listed within the total number of listed monthly contract

Contract Series

One business day following the Last Trading Day.Payment Dates

US Business DaysBusiness Days


TOBLogical Code

ICE

Fu

tures E

uro

pe

ICE Futures EuropeNov 30, 2009

ASCI Differential Futures


The ICE ASCI Diff Future is a differential contract which is cash settled against the Argus Sour Crude Index differential price (ASCI) . The contract enables the hedging and trading of a representative basket of US Gulf sour crudes alongside the US WTI Light Sweet Crude Futures benchmark

Description

The contract will be open for trading from 17:00 Central US Time (usually 23:00 London local time) on Sunday evenings and 19:00 Central US Time on Monday to Thursday evenings (usually 01:00 London local time on Tuesday to Friday mornings.

Trading will cease at 17:00 Central US Time (usually 23:00 London local time) each day.

Trading Hours

Contracts are traded on the ICE Platform or by the Exchange of Futures for Physicals (EFPs), Exchange of Futures for Swaps (EFSs) or Block Trades.

Trading Methods

Minimum of 1 lot of 1,000 barrels per lot.Contract Size

1 lot equals 1,000 barrels.Units of Trading

The contract price is in US dollars and cents per barrel.Quotation

One cent per barrelMinimum Price Flux

There are no limitsMaximum Price Flux

Up to a maximum of 72 consecutive contract months. Quarters and calendar yearly strips will be listed for the entire forward curve.

Twelve additional contract months will be added each year on the expiry of the prompt December contract month.

Trading Period/Strip



The Exchange may impose position accountability levels or limits on positions in this contract at its discretion as provided in Rules P8 and P3 respectively.

Current position accountability levels: In any one month: 10,000 net futures, all months: 20,000 net futures.Current position limits: 3,000 contracts in the last three trading days in the spot month of the ICE ASCI Future (Argus)

Exemptions from position limits may be granted at Exchange discretion for bona fide hedge positions.

Position Limits

Calculated on all open contracts, initial margin is a deposit held by ICE Clear Europe Limited in order to cover the costs that may be incurred in closing out a position in default. It is returned upon the closing of the position, or at expiry, with interest.

Initial Margin

All open contracts are 'marked-to-market' daily, with variation margin being called for as appropriate. This process compares the settlement price, established by ICE Futures Europe, with the previous day's settlement price (or traded price for new trades).

Daily Margin

Trading shall cease at the close of business on the 4th US business day prior to the 25th calendar day of the month preceding the contract month. If the 25th calendar day of the month is not a US business day the Final Trade Day shall be the Trading Day which is the fourth US business day prior to the last US business day preceding the 25th calendar day of the month preceding the contract month.

Cessation Of Trading

Cash-settled at a price equal to the ASCI-Weighted "Diff" as published by Argus Media in the 'Argus Crude' report under the heading 'Argus Sour Crude Index'.

Delivery Methods

Payment for contracts will be made through ICE Clear Europe Limited on, or around, 1 business day after expiry of the contract month.

Payment Dates

The Contracts are governed by English law.Other Information

ICE Clear Europe Limited guarantees financial performance of all ICE Futures Europe contracts registered with it by its clearing members. ICE Futures Europe Members are either members of ICE Clear Europe Limited, or have a clearing agreement with a Member who is a member of ICE Clear Europe Limited.

Clearing

ICE Futures is regulated in the UK by the Financial Services Authority (FSA) as a recognised investment exchange (RIE) under Part XVIII of the Financial Services and Markets Act 2000 (FSMA).

Further, ICE Futures Europe has: secured the relevant

Regulation



regulatory approvals; or, secured a statement of no objection; or, satisfied itself that it does not require regulatory approvals, to allow direct access to the ICE Platform in a number of other overseas jurisdictions, such as USA and Singapore. The complete list of jurisdictions can be found at: www.theice.com/publicdocs/futures_jurisdiction.pdf

In accordance with FSMA, all ICE Futures Europe General Participant Members based in the UK will be authorised and regulated by the FSA. Where General Participant Members are incorporated overseas, they will be regulated by the relevant regulatory authority in that jurisdiction or benefit from relevant exemptions of that authority.


MECLogical code

ICE

Fu

tures E

uro

pe

ICE Futures EuropeNov 30, 2009

ASCI Future


The ICE ASCI Future is cash settled against the Argus Sour Crude Index price (ASCI) to complement the existing ICE WTI futures contract. Additionally the contract enables effective hedging in the sour crude markets by creating a sour crude benchmark based on trading in the US Gulf coast.

Description

The contract will be open for trading from 17:00 Central US Time (usually 23:00 London local time) on Sunday evenings and 19:00 Central US Time on Monday to Thursday evenings (usually 01:00 London local time on Tuesday to Friday mornings.

Trading will cease at 17:00 Central US Time (usually 23:00 London local time)each day.

Trading Hours

Contracts are traded on the ICE Platform or by the Exchange of Futures for Physicals (EFPs), Exchange of Futures for Swaps (EFSs) or Block Trades.

Trading Methods

Minimum of 1 lot of 1,000 barrels per lot.Contract Size

1 lot equals 1,000 barrels.Units of Trading

The contract price is in US dollars and cents per barrel.Quotation

One cent per barrelMinimum Price Flux

There are no limitsMaximum Price Flux

Up to a maximum of 72 consecutive contract months. Quarters and calendar yearly strips will be listed for the entire forward curve.

Twelve additional contract months will be added each year on the expiry of the prompt December contract month.

Trading Period/Strip



The Exchange may impose position accountability levels or limits on positions in this contract at its discretion as provided in Rules P8 and P3 respectively.

Current position accountability levels: In any one month: 10,000 net futures, all months: 20,000 net futures.Current position limits: 3,000 contracts in the last three trading days in the spot month of the ICE ASCI Future (Argus)

Exemptions from position limits may be granted at Exchange discretion for bona fide hedge positions.

Position Limits

Calculated on all open contracts, initial margin is a deposit held by ICE Clear Europe Limited in order to cover the costs that may be incurred in closing out a position in default. It is returned upon the closing of the position, or at expiry, with interest.

Initial Margin

All open contracts are 'marked-to-market' daily, with variation margin being called for as appropriate. This process compares the settlement price, established by ICE Futures Europe, with the previous day's settlement price (or traded price for new trades).

Daily Margin

Trading shall cease at the close of business on the 4th US business day prior to the 25th calendar day of the month preceding the contract month. If the 25th calendar day of the month is not a US business day the Final Trade Day shall be the Trading Day which is the fourth US business day prior to the last US business day preceding the 25th calendar day of the month preceding the contract month.

Cessation Of Trading

Cash-settled at a price equal to the ASCI-Weighted "Price" as published by Argus Media in the 'Argus Crude' report under the heading 'Argus Sour Crude Index'.

Delivery Methods

Payment for contracts will be made through ICE Clear Europe Limited on, or around, 1 business day after expiry of the contract month.

Payment Dates

The Contracts are governed by English law.Other Information

ICE Clear Europe Limited guarantees financial performance of all ICE Futures Europe contracts registered with it by its clearing members. ICE Futures Europe Members are either members of ICE Clear Europe Limited, or have a clearing agreement with a Member who is a member of ICE Clear Europe Limited.

Clearing

ICE Futures is regulated in the UK by the Financial Services Authority (FSA) as a recognised investment exchange (RIE) under Part XVIII of the Financial Services and Markets Act 2000 (FSMA).

Further, ICE Futures Europe has: secured the relevant

Regulation



regulatory approvals; or, secured a statement of no objection; or, satisfied itself that it does not require regulatory approvals, to allow direct access to the ICE Platform in a number of other overseas jurisdictions, such as USA and Singapore. The complete list of jurisdictions can be found at: www.theice.com/publicdocs/futures_jurisdiction.pdf

In accordance with FSMA, all ICE Futures Europe General Participant Members based in the UK will be authorised and regulated by the FSA. Where General Participant Members are incorporated overseas, they will be regulated by the relevant regulatory authority in that jurisdiction or benefit from relevant exemptions of that authority.


CRDLogical code

product guide - ice · 2009. 12. 8. · the u.s. gulf is a key region for the u.s. oil industry,...

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