Asia falls further behind US, Europe in financial oil trading

SINGAPORE (REUTERS) - Asia is dropping further behind the United States and Europe in financial oil trading despite being the world's biggest fuel-consuming region, exposing refiners from China to Singapore to the moods of speculators who often ignore market fundamentals.

While China's Unipec, a unit of state refiner Sinopec, vies with Europe's Vitol to be the top global crude trader, Asian might in physical markets has not spilled over into international futures trading.

Exchange data shows crude futures trading in Asia is stagnant, while volumes in Europe and North America have soared to records several times over the past year. The data also shows the biggest price movements occur outside of Asian office hours.

That's a problem for producers, refiners and oil traders in Asia, and the desire for greater influence could spur China's ambitions to launch a long-delayed and troubled crude futures contract that would better reflect regional market conditions.

"It's a risk to commit to selling or buying during Asian hours, because you never know what moves follow in night trading hours," said Kaname Gokon, strategist for commodities brokerage Okato Shoji in Japan.

Trading data shows that activity in Brent crude oil futures during the Asian day rarely tops 2,000 lots of 1,000 barrels per hour. That compares with 30,000 to 50,000 lots an hour during typical European or North American hours.

Park Young-hoon, a refinery analyst at Hanwha Investment & Securities in South Korea said Asian "refiners have no options to respond" to the might of Europe and the United States.

It is not just a question of which region dominates. Much of the shift is the result of behavioural changes in the markets.

Canadian investment bank RBC Capital said this week that"tourist traders" were increasingly dominating oil markets rather than real oil market conditions.

"Oil market intelligence has been diluted over recent years given the rise of algorithmically charged participants, from what historically was a physically driven market," RBC said.

Due to technology and big data this change is seen as unavoidable.

"The whims of financial traders halfway across the globe make it hard for us to plan hedging strategies that are in tune with our refinery output," said a trader with a large Asian refiner, speaking on the condition of anonymity as he was not allowed to disclose financial information.

Though it's true that US and European refiners and producers can also be impacted by speculators, many western oil majors such as Royal Dutch Shell, Chevron and BP are known to have large financial trading desks that help them to counter and make money from big market moves.

Overall trading in Brent futures has soared, from under 1 million lots typically exchanged per month before 2005 to a record 7.3 million exchanged in May.

Asia has so far played only a marginal role in the rise in crude futures trading. That may eventually change, though, as China steps up efforts this year to launch its much-awaited Shanghai crude futures contract.

"China wants a seat at the global energy futures table, and is actively encouraging commodity trading and investment," said John Driscoll, director of JTD Energy Services in Singapore.

The project's details have been criticised - including for its denomination in yuan and the expected dominance of Chinese companies - yet few doubt that China's size and its culture of widespread retail trading mean a high-volume Chinese oil futures benchmark will eventually emerge.

Shanghai's crude futures, currently planned for launch later this year, will likely see China's state-owned energy companies like Sinopec and PetroChina acting as market makers, giving them strength in financial trading similar to what they have long held in physical markets.

It has already happened in commodities such as iron ore, coal and steel, where Chinese futures contracts have become global benchmarks after being widely dismissed by US and European traders initially.

"(Crude) futures in China … are part of a longer term strategy to develop the domestic market and develop an Asian benchmark," said Michal Meidan, lead analyst for Asian energy policies at Energy Aspects.