CME unveils new oil futures contract to tackle Canadian discount woes

Mon Dec 16, 2013 7:00am EST
 
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By Nia Williams

CALGARY, Alberta Dec 16 (Reuters) - CME Group Inc will launch its first light sweet oil futures contract for Canada on Monday in the latest attempt to help producers limit the price misery caused by overcrowded pipelines.

The Edmonton Sweet futures contract will give producers, refiners and speculators in the Canadian oil patch the opportunity to lock in light oil prices up to four years in advance and hedge their exposure to wild price swings.

Canadian crude tends to trade at a hefty discount to the West Texas Intermediate benchmark because a lack of space on export pipelines to the United States means crude shipments get bottlenecked in Alberta.

Sweet crude in Edmonton for January delivery last traded around $13.30 per barrel below WTI, having been close to parity in May, while front-month Western Canada Select, the region's de facto benchmark heavy grade, plunged below $40 per barrel under WTI in November.

That volatility poses a problem for producers trying to manage capital budgets, an issue the new Edmonton Sweet contract is intended to help tackle.

It will be settled against Calgary-based broker Net Energy Inc's index, with prices based on light sweet crude delivered in Edmonton from a number of different pipelines.

"The ability to lock in a differential between WTI and Edmonton Sweet is definitely an advantage. It provides more clarity on the pricing regime in Canada," said Scott Brundrit, marketing and transportation manager at Athabasca Oil Corp .

Athabasca Oil, a 6,500 to 7,000 barrel per day light oil producer with projects in northeastern Alberta, does not currently hedge its production, but Brundrit said that was likely to change as output and capital programmes increase.   Continued...