David North
PVM Smart Learning
David worked at BP for 19 years. During this period, he was book leader for the
European gasoline trading group, the North Sea Crude equity team and the UK
and European Natural Gas trading books. After BP, David moved to Klesch and
Co., a private equity firm which specialises in distressed asset acquisition, and
was instrumental in establishing a metals and energy trading platform which
allowed Klesch to expand it’s portfolio of energy-intensive businesses. Most
recently, David worked at RWE as Head of Physical Oil Trading, moving RWE’s
capability in this area from that of a paper-only player to a company able to
compete in global physical markets. David specialises in identifying optionality
within portfolios or trading propositions and establishing the ability to harvest
and monetise it.
ICE BRENT NX
Characteristics and Value
David North
Copyright © 2012 PVM Smart Learning. All rights reserved.
Areas to Cover
• Background and history
• Changes and rationale
• Possible value shift
• Knock-on effects
Genesis of Brent Contract
• Evolved from 15 day Brent “partials”
• First traded June 1988 “open outcry” on IPE floor
• June 2002, Forties and Oseberg added to contract
• Move to 21 day nomination (from 15 day)
• Jan 2003 tolerance cut to 1pct
• 2007 Ekofisk added to contract
Genesis of Brent Contract (cont)
• 2007 Sulphur de-escalator introduced (following Buzzard
field introduction)
• Continued decline in Brent and Forties production sees
Platts move to a 25 day dated window to increase
available cargoes
• Brent nomination changes to 25 days to match up with
Platts
• ICE Introduce Brent NX to mirror changes in underlying
(starting 12/12 contract)
Effects on Futures Market
• Expiry of futures originally set to mirror 15 day calendar
• “cash out” price of futures set on last day of trading
before nominations
• To remain “real”, futures must reflect the underlying
(hence moves to BFO and BFOE)
• With move to 25 days nomination, current calendar too
far removed from “natural” expiry
Brent Index
The index is calculated as an average of the following elements:
1. A weighted average of first month cargo trades in the 21day BFOE market.
2. A weighted average of second month cargo trades in the 21
day BFOE market plus or minus a straight average of the
spread trades between the first and second months.
3. A straight average of designated assessments published in
media reports.
Trading day is from 0930 to 1930 GMT
Value
• ICE Brent NX and ICE Brent have identical settlement
mechanisms
• ICE Brent NX and ICE Brent settle off exactly the same
instrument
• The only difference is that of timing
• Does that timing confer any value difference?
Possible Value Shift (1)
• Each contract settles at an average of BFOE prices on
expiry day
• Thus each contract should be valued at equal to a BFOE
contract for that month owned on that day
• Does earlier ownership of a BFOE cargo imply any value
difference?
• Very possibly.....
Possible Value Shift (2)
1.6
Dec Dated
1.4
Available for NX
Available for Brent
1.2
1
0.8
0.6
0.4
0.2
0
01-Dec
06-Dec
Available for Brent
Available for NX
11-Dec
16-Dec
21-Dec
Dec Dated
26-Dec
31-Dec
Possible Value Shift (3)
• In graphic, Blue line shows the value of all December
dates
• Red line shows the value of all December dates
“available” to a holder of BFOE cargo at NX expiry
• Green line shows the value of all December dates
“available” to a holder of BFOE cargo at Brent expiry
• In this case the average value available to the NX holder
is 25 cents/bbl better than a Brent holder
• However is average value relevant?
31-Dec
29-Dec
27-Dec
25-Dec
23-Dec
21-Dec
19-Dec
17-Dec
15-Dec
13-Dec
11-Dec
09-Dec
07-Dec
05-Dec
03-Dec
01-Dec
Possible Value Shift (4)
0
-0.2
-0.4
-0.6
-0.8
-1
-1.2
-1.4
-1.6
Dec Dated
Available for NX
Available for Brent
Possible Value Shift (5)
• In graphic, Blue line shows the value of all December
dates
• Red line shows the value of all December dates
“available” to a holder of BFOE cargo at NX expiry
• Green line shows the value of all December dates
“available” to a holder of BFOE cargo at Brent expiry
• In this case the average value available to the NX holder
is 25 cents/bbl lower than a Brent holder
• However is average value relevant?
Possible Value Shift (6)
• In each case, value is different by 1/6th of a month’s structure
• Valued this way, Brent NX is more valuable in backwardation,
ICE Brent more valuable in Contango
However....
• Would you ever see those early dates in a backwardated
market?
• Very likely to see early dates in a contango market
• It may therefore be that we could rely on a discount for Brent
NX in Contango, but not on a premium in backwardation
Possible Value Shift (7)
• EFP (difference between BFOE and futures value) will be
zero to the respective futures contract at expiry.
• Value of Brent NX vs ICE Brent is therefore the value of
an EFP to ICE Brent futures 10 days before expiry.
• This value can be positive or negative depending on the
state of the physical market.
• This logic is really a short-circuit to previous calculations.
Possible Value Shift (8)
• Significant open interest held in current contract beyond
Dec 12
• How much of that will migrate?
• Will one “class” migrate more readily than another?
• For example, a strategic hedger may be comfortable to
stick with the old contract, a spec player may wish to
migrate
• Are the longs more mobile than the shorts?
Dated to Front Line
• Clear shift in DFL values
• For any given period you “lose” around 1/3rd of the
current first Front Line month and “gain” around 1/3rd of
the current last Front Line month
• All intervening months are common
Dated to Front Line (Cont)
• Thus Cal 13 DFL should shift by roughly 1/3rd of Feb/Feb
spread (current vs NX)
• 1q 13 DFL should shift by roughly 1/3rd of Feb/May
spread
• Any value differential between Brent NX and ICE Brent
will of course impact value
• Visit smartglobaltrading.com for position and value
shift calculator