Tags: oil | energy | exchanges | trading

Oil Tumble Gives Lift to Exchanges as Trading Picks Up

Wednesday, 03 December 2014 12:24 PM

While plunging oil prices are hurting some investors, they’ve been a boon to CME Group Inc. and Intercontinental Exchange Inc.

Combined daily volume of benchmark crude futures jumped to the highest level since mid-October, boosting revenue for the exchanges, after OPEC’s refusal to cut output pushed prices to five-year lows. November volume rose 12 percent from a year ago.

Volatility has more than tripled since July to the highest since 2012, offering investors more opportunities to profit from trading futures and options. Oil dropped last month the most since 2008 as U.S. production grew to a three-decade high, output from OPEC nations climbed and growth of global demand slowed.

“Volume drives revenue,” Niamh Alexander, an analyst at New York-based brokerage Keefe, Bruyette & Woods, said by phone Dec. 1. “The elevated volatility is generally good for trading volume. You are entering into a phase where there is a lot more positioning and uncertainty.”

West Texas Intermediate oil and Brent have slumped more than 35 percent from the year’s highs in June, while shares of CME jumped 19 percent and those of Intercontinental Exchange 14 percent over the same period.

“As an exchange, CME Group is price-agnostic,” Chris Grams, a spokesman, said Dec. 1 in an e-mail, “Buyers and sellers trade our WTI futures and options on futures based on their own risk management or investment needs as well as macro supply and demand dynamics.”

Falling Prices

Brookly McLaughlin, a spokeswoman for the Intercontinental Exchange, declined to comment on how the falling oil price will affect the company’s bottom line.

WTI, the U.S. benchmark, added 22 cents to $67.10 a barrel at 11:51 a.m. on the New York Mercantile Exchange. Brent, the standard for more than half the world’s oil, dropped 31 cents to $70.23 on the London-based ICE Futures Europe exchange.

Total volume of WTI futures on the Nymex and Brent on the ICE increased to 1.78 million contracts on Dec. 1, the most since Oct. 16. Energy trading volume jumped 25 percent in November from a year ago to average 1.92 million a day, CME said.

The trading of energy contracts accounts for about 20 percent of Intercontinental Exchange’s revenue and 17 percent of CME’s, according to Alexander, who has an “outperform” rating on both companies.

‘Great Money’

“The exchanges are making great money,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone. “Volatility is high. There is more opportunity for traders and fund managers when you have bigger movements. The worst thing that the exchanges can have is a sideways market.”

The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the United States Oil Fund, was 38.6 yesterday, the highest since June 2012. Volume of the fund, the largest exchange-traded product tracking WTI futures, jumped to 26 million shares on Dec. 1 from 10.8 million Nov. 21.

“OPEC certainly has sent waves crashing through the oil market,” John Hyland, chief investment officer of United States Commodity Futures Funds, the Alameda, California-based manager of the U.S. Oil Fund, said in an e-mail Dec. 1. “One impact, for USO, is that volume has pretty much doubled over the last week.” Another impact is the jump in volatility, he said.

Previous Declines

Volume responded differently in earlier market crashes. It dropped 8.9 percent in the second half of 2008 as the global recession sent WTI tumbling to $32.40 in December 2008 from a record $147.27 in July. It surged 33 percent during the Asian financial crisis as oil crashed to about $10 in December 1998 from $27 two years earlier.

This year’s price slump already forced some hedge funds to close. Brevan Howard Asset Management LLP, which oversees $37 billion, is shutting its commodity fund run by Stephane Nicolas after losses this year, according to two people with knowledge of the matter.

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world’s oil supply, produced 30.56 million barrels a day in November, exceeding its 30 million target for a sixth month, according to data compiled by Bloomberg. It decided to maintain its production quota at a Nov. 27 meeting in Vienna.

“In the short run, with these big price swings, it should increase volume,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone Dec. 1. “The volatility is going to drive a lot of money into the market.”

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While plunging oil prices are hurting some investors, they've been a boon to CME Group Inc. and Intercontinental Exchange Inc.
oil, energy, exchanges, trading
Wednesday, 03 December 2014 12:24 PM
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