CME Group answers your questions

Terry Duffy

Craig Donohue

In this week’s readers’ Q&A session, Terry Duffy and Craig Donohue, chairman and chief executive of the CME Group, answer your questions. The CME is one of the largest commodities exchanges in the world, and is home to the WTI crude benchmark, making them perfectly placed to answer any questions on oil price volatility.

Below, they answer questions on the spread between WTI and Brent crude, the future direction of the oil price and whether the group willbe involved in trading European carbon emissions.

The Q&A sessions are taking a break for three weeks, but will be back in March with Francesco Starace, chief executive of Enel Green Power, in the hotseat. We will publish more details closer to the time.

But for now, over to Terry and Craig:

1) Are any changes to the terms of the WTI contract being considered, to make it less dependent on factors that are strictly local to Cushing?
Marben100

We have just recently had discussions with many market participants around the world who use and trade our benchmark WTI contract. Our energy team does this on a regular basis and no one has asked us to change the structure of the contract.

What is happening right now is that the industry is making investments in the petroleum infrastructure around the Cushing delivery point to address oversupply issues by providing pipeline distribution to the Gulf Coast. That investment demonstrates the industry’s strong commitment to WTI. Also, we’ve heard that up to an additional 20m barrels of storage is being constructed this year. Because there is such a vibrant WTI physical market – 10m bpd – the industry can make these changes in a timely manner and make adjustments in the interim as needed.

Another strength of the WTI market is transparency of fundamental market information that is available for the US at-large but its different regional markets as well. Each week, within three business days, we find out about storage levels and refinery runs and utilisation for each region of the US (from the US Department of Energy). There is nothing comparable available and this makes hedgers, traders, investors and observers in the WTI market the best informed participants and observers in the world oil market; and it makes the WTI price and forward price curve the most content-reflective prices in the world oil market.

This transparency in the WTI market is the key advantage to the contract and why it has been successful compared to other benchmark contracts, such as Brent and Dubai. Our markets, which are highly regulated, are regarded by the industry as having integrity and relevance, which is why we currently have more than 10m contracts in open interest in WTI-related products.

2) As a quant fund manager working regularly with CME energy products… I was very excited by the launch of the CMEs oil VIX products. However, months after launch, CME apparently still hasn’t found any market makers for this thing. Why not? Are you going after the right partners? Have you considered compensating liquidity providers?
C Tang

Our seven-year licensing agreement with the CBOE and their volatility indexes have helped establish both our Crude Oil Volatility Index futures and options and our Gold Volatility Index futures and options. These are new contracts and we are excited to offer these as ways for customers to manage their risk around oil and gold.

The feedback we’ve received is extremely positive and we are actively working with other parties, including liquidity providers, to help grow this emerging asset class. These new indexes provide a direct and effective way to track volatility in a variety of benchmark asset classes by leveraging the liquidly of our electronic markets.

3) What is your estimate for change in oil versus natural gas worldwide market share over the next 10 years?
Martin Romine

We cannot predict such things in our role as the marketplace but it is extremely important that the market has reliable and unambiguous signals regarding value and future value for these and other commodities. This is why we offer futures and options for both crude oil and natural gas, as well as more customised products for each and related products. This ensures market participants can hedge any potential market risks they encounter, capitalise on any trading opportunities they see between different products, and take advantage of the many investing opportunities related to oil and natural gas.

Since our markets are transparent and regulated you should see that they react to supply and demand of the underlying commodities. We cannot predict which hedges, trades or investments they will make but can ensure that we will always be quickly responsive to their needs to do so.

4) What is the WTI forecast forward curve for next 12 months, excluding speculation?
Pablo Acevedo

Our transparency and regulated markets show a forward curve out to eight years accessible on our website. As the marketplace, we don’t provide our own personal opinions on future prices, but you can see from participants the reflection of their opinions on price.

5) Does CME plan to tender for running the EU emissions trading scheme’s new centralised carbon trading platform, due to come in in 2013?

Philip Stafford

If CME Group does become involved in the EU emissions trading scheme initiative, it is most likely to do so indirectly via the GreenX, in which we own a significant stake, provided it is eligible to participate. These are early times for carbon markets and the proposed regulations, and we are certainly watching the industry closely.

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