Brent oil contango is widest in three months as surplus piles up

Brent crude futures traded at their deepest discount to later-dated contracts since June, signaling the global oil surplus is growing more severe. 

PHOTO: AFP

SEP 15, 201510:10 PM

[LONDON] Brent crude futures traded at their deepest discount to later-dated contracts since June, signaling the global oil surplus is growing more severe.

The spread - or contango - on front-month Brent compared with the next-month contract widened to as much as $1.17 a barrel, the most since June 15, a sign that immediate supplies still exceed demand. The glut may also be reflected in US crude inventory data due Wednesday, with stockpiles that are already 100 million barrels above the seasonal norm projected to have increased 1.75 million barrels last week, according to a Bloomberg survey.

"It signifies a material oversupply," Seth Kleinman, head of energy strategy at Citigroup Inc in London, said by phone of the expanding spread.

"US production is not going down fast enough given the continuous growth we seem to be having from Opec."

Oil has slumped about 30 per cent from this year's closing peak in May amid signs the global surplus that drove prices to a six-year low will persist. Goldman Sachs Group Inc said last week that the excess is bigger than it initially anticipated and crude could fall as low as US$20 a barrel.

Brent for October settlement, which expires Tuesday, rose as much as 53 cents, and was up 24 cents at $46.61 a barrel on the London-based ICE Futures Europe exchange at 1:50 pm local time. The more-active November contract climbed 40 cents to $47.75. The front-month European benchmark crude traded at a premium of as little as $2.09 to West Texas Intermediate, the narrowest gap since January.

WTI for October delivery gained 35 cents to $44.35 a barrel on the New York Mercantile Exchange. The volume of all futures traded was about 5 per cent below the 100-day average for the time of day. Prices have decreased 17 per cent this year.

Increasing supplies from Opec members such as Iraq are adding to the surplus, Citigroup's Kleinman said. Iraq plans to increase exports of crude from its southern region by 26 per cent next month, with a combined 81 cargoes of Basrah Light and Basrah Heavy grade crudes totaling 114 million barrels, according to a loading program obtained by Bloomberg News.

The Organization of Petroleum Exporting Countries trimmed its estimates for growth in output from outside the group next year by 110,000 barrels a day in its monthly market report. Supplies from non-Opec nations such as the US, Canada, Russia and Brazil will increase by 160,000 barrels a day to 57.6 million in 2016, the group's Vienna-based secretariat said Monday.

The projected increase in US crude stockpiles for the week through Sept 11 coincides with a drop in refiners' operating rates as gasoline demand slips with the end of summer's driving season. The Energy Information Administration report will be published at 10:30 am in Washington on Wednesday.

"We've probably seen the floor, but I wouldn't expect to see any strong rally in the near term because the surplus that pushed oil down is still there," David Lennox, an analyst at Fat Prophets in Sydney, said by phone.

BLOOMBERG

      

China takes aim at automated trading in commodities futures

SEP 15, 201511:58 PM

[SHANGHAI] China is extending its control of onshore markets to commodities exchanges, spooked by signs that speculators have shifted from China's volatile stock markets to commodities futures.

The country's top commodities exchanges - the Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and Zhengzhou Commodity Exchange (ZCE) - were asked recently by China's exchange regulator to draft rules designed to "regulate the behaviour of program trading" in futures markets, according to people familiar with the matter.

The move comes on the back of a slew of new regulations aimed at curbing what Chinese authorities call "malicious"trading in stock futures, blamed in part for stoking the turmoil that saw stocks slide over 40 percent since June.

That prompted hedge funds and other investors to steer their order flow into commodities, which had previously not been impacted by Beijing's regulatory overhaul.

But after trading volumes in commodities futures such as iron ore jumped sharply last week - just as new stock trading rules kicked in - Beijing appears concerned about the potential for the flow of orders to overwhelm the country's commodities futures markets, which rank second in the world behind the United States in terms of traded volume on the top three commodity bourses.

A draft of the regulatory changes considered by the Dalian Commodity Exchange, and circulated to a select group of members for feedback, focuses on tightening controls on program or automated trading.

Anyone placing more than 4,000 trades per day based on more than five instances of five orders per second will be considered a program trader.

Traders would be required to provide details of the identity of those conducting program trading, and where they get their funding. Details on program trading strategies and the location of trading servers would also have to be provided to the exchanges. Failure to do this could lead to yet-to-be-defined disciplinary action.

Traders who submit but then withdraw within a second before execution more than 60 per cent of the more than 4,000 placed orders on the exchange's order-entry platforms will also trigger increased regulatory oversight.

And traders would be restricted to placing no more than 4,000 trades if they execute orders for more than two futures products, or buy and sell orders of the same product in different futures contract months within one second.

"This is at a preliminary stage and the exchanges are still working on details," said one individual with direct knowledge of the matter. The DCE, SHFE and ZCE were not immediately available for comment.

Locally-registered traders and brokers active in China's commodities markets say the new rules would likely "force out"some firms that specialise in arbitrage trading strategies aimed at exploiting short-term price differences for the same commodity in different months, or different commodities within the same contract month.

One broker said "more than half" of his firm's positions on the SHFE involved buying and selling in different months, and so would be impacted if these new proposals came into effect.

Other sources downplayed the likely impact of the proposals, noting that program trading makes up only a small portion of China's commodity markets. "Computer-driven program trading is not widely used in commodity trading, and I think the exchange (will adopt these rules) just in case and is being over-cautious," said a fund manager who trades commodities and other assets.

A fund trader in Shanghai said the measures could slow down funds that exited from stock futures and plan to enter commodities.

REUTERS

      

Fragmented rules prevent ECB from acting early on weak banks

Fragmented and sometime overly restrictive national rules can keep the European Central Bank from helping struggling banks before they are at risk of failing, the European Central Bank's supervisory chief said on Tuesday. 

PHOTO: AFP

SEP 15, 20159:36 PM

[VIENNA] Fragmented and sometime overly restrictive national rules can keep the European Central Bank from helping struggling banks before they are at risk of failing, the European Central Bank's supervisory chief said on Tuesday.

A European directive on banking resolution gives supervisors the power to take "early intervention measures", such as demanding changes to management and strategy, if an institution is struggling.

But the directive has been implemented inconsistently across the eurozone, said Danielle Nouy, the chair of the ECB's supervisory board, and sometimes the bar for early intervention has been set too high.

"When we look at the conditions to (intervene), based on the different implementation of the recovery and resolution directive, the conditions are quite different," Ms Nouy said at an event in Vienna. "In certain cases, I don't quite see how we could take early intervention measures before the bank has almost disappeared."

The ECB took over supervision of the region's largest banks late last year and is due to set capital requirements for the banks under its watch. Common supervision is one of three pillars of the eurozone's banking union, along with a single resolution authority and a common deposit guarantee.

With the former two already in place or being implemented, Ms Nouy said, the introduction of a single guarantee on European bank deposits would take some time.

"It would be something nice to have, but I'm quite satisfied already with the current situation," Ms Nouy said during a panel discussion. "Solidarity is not yet there - it will take some time."

She was responding to fellow panelist and Erste Group Chief Executive Andreas Treichl, who had said earlier he was no longer expecting the scheme to come to fruition.

REUTERS

    
 

Emerging market stock allocations at all-time low: BAML poll

SEP 15, 20158:52 PM

[LONDON] Investors have cut their emerging market stock allocations to an all-time low and raised cash balances to levels seen during the 2008 crisis as risk appetite has evaporated, a Bank of America Merrill Lynch (BAML) survey showed on Tuesday.

Investor confidence in the global economic outlook has fallen significantly, according to the bank's fund manager survey for September, with underweights to emerging market equities at a record net 34 per cent.

Some 75 per cent of respondents identified a recession in China or an emerging markets debt crisis as the biggest tail risks.

Given this gloomy outlook it is perhaps not surprising that only 25 per cent of survey respondents now expect the US Federal Reserve to raise interest rates this week, down from 48 per cent in August. About 55 per cent of respondents expect the first US rate rise for nearly a decade in the fourth quarter.

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Investors have pulled some US$58 billion from emerging market equity funds in the year to date taking fright at mounting political turmoil, Chinese stock market volatility and worsening economic data.

In its September report, BAML noted an "unambiguous flight to quality", with a big increase in respondents' weightings to cash and bonds.

Cash levels are now at 5.5 per cent, equivalent to the highs set following the collapse of US investment bank Lehman Brothers in 2008, whilst bond allocations are at their highest since May 2013.

"Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified," said Michael Hartnett, chief investment strategist at BAML Global Research.

Equity allocations were cut to a three-year low, commodity shorts were extended, and hedge fund gross asset exposure sank to its lowest level since June 2012.

An overall total of 214 respondents with US$593 billion of assets under management participated in the survey, which was carried out between Sept 4-10.

REUTERS

      

Rules for 'dark pool' trading need strengthening: report

SEP 15, 20158:20 PM

[WASHINGTON] US regulators need to accelerate their efforts beef up the rules governing "dark pool"trading platforms to better protect investors from poor trade execution and conflicts of interest, according to a new report released Tuesday.

The report by the Health Markets Association urges the Securities and Exchange Commission to strengthen the quality of dark pool disclosures, take steps to mitigate conflicts of interest at dark pools, and update its rules designed to ensure investors get the best price and the most efficient execution for their trades.

It also takes a swipe at some of the enforcement actions the SEC has undertaken in recent years with dark pools such as Pipeline and UBS, saying settlements failed to take into account the true harm these platforms inflicted on investors.

"Even the largest, oldest and most well-respected dark pools are not above wrongdoing," the report said.

Healthy Markets Association is a non-profit advocacy group that was founded by two equities market experts at consultancy firm KOR Group and headed by Tyler Gellasch, a former counselor to SEC Democratic Commissioner Kara Stein and Michigan Senator Carl Levin.

The report comes at a time when dark pools have increasingly come under regulatory scrutiny.

Dark pools were created to allow large investors to trade big blocks of trades without tipping off the broader market. Brokerages also offer similar dark markets internally to their clients.

Such platforms are not required to publicly display bids or offers - a fact that some say might be harming price discovery on public exchanges.

Since 2011, the SEC has stepped up enforcement against dark pools that have violated rules.

To date, it has filed cases against six platforms for a variety of violations, from failing to disclose to customers that most of their orders were filled by an affiliate to misusing customer data.

The report said the SEC's cases focus more on disclosure failures, and the settlements could have done more to quantify the actual harm investors suffered.

It also says it is not optimistic that the SEC will move swiftly to write new rules. "To date, regulators have not proposed any substantive reforms," the report says.

REUTERS