European oil product swaps

The growth of the European product swaps market started as an alternative to basis risk trading, and the lack of actively traded future exchanges for particular products. Traders using crude as a basis for financing product differentials often suffered huge losses.

The case of volatile jet fuel prices during the Gulf War, and the reformation of the former Soviet Union contributed to the growing popularity of product swaps.

European product swaps are based on products published in the daily Platts European Marketscan.

Gasoline: Premium 0.15 swaps were the first gasoline swaps traded as there were no European future contracts available. The move by the European community to reduce lead levels in gasoline produced a growth in the physical Premium Unleaded spot market which in turn created a demand for Premium Unleaded swaps.

Premium Unleaded swaps are largely based on Platts FOB Rotterdam barge quotations, FOB Med and Northwest Europe Cargo quotations. Regular Unleaded swaps are also based on Platts FOB NWE cargo and FOB Rotterdam barge quotations. Gasoline swaps trade between 1,000-20,000mt up to one year forward.

Naphtha: Naphtha swaps have almost replaced the declining forward paper market. The naphtha paper market was created ten years ago as a hedging tool due to the lack of a futures exchange. The IPE launched a naphtha contract in 1991, which ceased trading because of few active participants and low volume.

Naphtha swaps trade up to one year forward and are priced off the Platts Cif Nwe physical cargo quotations. Trade is between 5,000-20,000 mt.

Jet: Jet swaps trade at a differential to the IPE gasoil contract and volume has increased since the Gulf War. Far East and European airlines are active participants, as well as traders, refiners, and other end-users. Some tour operators also use swaps to fix pricing margins.

Jet swaps are priced on Platts CIF NWE and FOB MED cargo quotations. Trade is based on 5,000-20,000 mt.

Fuel Oil: High sulfur 3.5% swaps are used for hedging bunker (ship fuel) supply and demand. 3.5% swaps price on Platts FOB Rotterdam barge and FOB MED cargo quotations.

1% swaps are actively traded as a hedging tool against the strong European utility demand, and are priced off the Platts FOB NWE Cargo quotations.