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IRAN - IPE Pit Closure Brings With NYMEX Closer.

The IPE's decision on April 7 to scrap open outcry trading was a high-risk strategy in its battle to fend off competition from NYMEX. The IPE closed its oil trading pit, and from April 8 offered only electronic trade. By contrast, NYMEX, the world's biggest commodity futures exchange, has committed itself to maintaining open outcry and in November opened a pit in Dublin which now hosts a rival version of the IPE's flagship Brent contract.

IPE's long dominance of Brent means its electronic contract will ultimately win out over NYMEX's open outcry version, and maintain a trend of financial markets which have gone all-electronic. On April 8 Reuters quoted Christopher Bellew of Bache Financial as saying: "The market that has the better liquidity will very likely retain it, in this case the IPE". But others say that, given the strength of oil dealers' feeling against electronic trade, the US exchange's clout must be respected - especially if NYMEX renews efforts to take over the IPE. Reuters quoted an un-named broker as saying: "As to which one will win, I guess the smart money has to be on electronic/IPE, but one shouldn't underestimate the determination of NYMEX and the goodwill from many parties to see their contract succeed".

Traders agree there is no room for both Brent contracts. Bache Financial's Bellew said: "It is unlikely that two nearly identical markets will succeed in the same time zone". In IPE's favour is the fact that many oil market participants have long-term contracts extending out for several years based on the IPE settlement price. But the IPE's decision to scrap open outcry trade altogether, rather than run two systems side by side, has increased uncertainty in the trading community about whether the London exchange can see off competition from NYMEX. Some see it as a huge error of judgement.

Analyst Peter Fusaro of Global Change Associates says: "The closing of the IPE floor on April 7 is a colossal mistake". Open outcry trade has been particularly suited to oil, which is often driven by events. The floor has the capacity to interpret news into financial terms. A trading screen cannot do that. Many argue that the ultimate would be for an exchange to offer both electronic and floor-based trading simultaneously, as could be brought about by a merger of the IPE's owner IntercontinentalExchange Inc (ICE) and NYMEX. NYMEX has long had its sights on Brent, used as a benchmark for pricing North Sea crude oils.

NYMEX in 2004 made a bid for ICE, but it was dismissed by ICE Chairman Jeffrey Sprecher as "an insult". ICE, based in Atlanta, Georgia, was formed in 2000 as an Internet-based trading platform by a group of major banks and energy companies and has applied for a New York Stock Exchange (NYSE) listing. It bought the IPE in 2001. While NYMEX Dublin Brent futures, launched last Nov. 1, have struggled so far, that could be about to change. NYMEX is expecting a flood of local traders, made redundant by the closure of the IPE pit, to head to Dublin by April 11, taking advantage of incentives offered by NYMEX including reduced fees. A total of 140 traders are registered on the Dublin exchange already. NYMEX is hoping its plan to move the Dublin pit to London, where the bulk of the European oil trading community is based, will generate still more interest. It has secured a lease on premises in central London and has said it will file in the very near future for approval by the Financial Services Authority. The FSA has said approval for NYMEX to begin trade in London would in theory take around four to six months, but has said it cannot comment further. Traders say there are precedents for less established contracts stealing volume from incumbents.

Meanwhile, energy prices and interest rates continue to dominate on the global scale. Worried US economists need to see oil prices fall further before the markets get comfortable, and inflation is still an issue. But investors in futures see things differently, now that their shift from equity to commodity markets seems to be extremely difficult to reverse in the near future.

The EIA on April 7 raised its forecasts for Chinese oil demand, changes which boosted the outlook for world oil consumption as a whole. The upward revisions in its monthly oil market outlook reinforced how demand - already so strong that it pushed producers and refiners to the limits of their capacity - continued to grow robustly despite soaring prices.

Acknowledging the pressure demand was putting on markets, the EIA saw WTI prices holding above $50/b through 2006. It wrote: "Several factors have contributed to the recent high crude oil prices and are likely to keep prices at or near present highs. First, worldwide petroleum demand growth is projected to remain robust, despite high oil prices". While Chinese oil demand - like overall world consumption - was not expected to grow as fast as it did in 2004, it was seen rising faster than expected early this year.

The EIA revised its forecasts for Chinese oil demand in the second and fourth quarters up by 100,000 b/d in each case, to 7.4m and 7.7m b/d, respectively. It left its outlook for full-year Chinese demand and demand growth unchanged. In line with those increases, it boosted its forecasts for second and third quarter world oil demand by 100,000 b/d, to 83.1m and 84.6m b/d, respectively. It raised its forecast for demand in the fourth quarter by 200,000 b/d, to 86.8m b/d. Demand in that quarter was already expected to test producers' ability to pump more oil. The new forecast left fourth quarter demand 700,000 b/d over projected supply. And the stress will end this year.

The US Energy Department's statistical arm raised its forecast for first quarter 2006 oil demand by 300,000 b/d, to 86.9m b/d, slightly pulling up the outlook for demand growth next year. It said projections for 2005 and 2006 called for world growth averaging 2.2m b/d, or 2.6%, per year, down from the 3.4% growth in 2004. Weaker than expected demand for gasoline in the US this summer was the exception to the EIA's upward revision. The EIA sees US gasoline demand of 9.34m b/d in the third quarter, 80,000 b/d below its previous forecast. The change pulled the forecast for overall US oil demand in the quarter down by 30,000 b/d, to 20.95m b/d. Nevertheless, growth in gasoline demand will be strong enough to push prices to new records. The EIA forecast summer gasoline prices of $2.28/g on average from April to September, up 38 cents from last summer. The EIA said: "Despite high prices, demand is expected to continue to rise due to the increasing number of drivers and vehicles and increasing per-capita vehicle miles traveled".
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Publication:APS Review Oil Market Trends
Geographic Code:1USA
Date:Apr 11, 2005
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