US oil products swaps

The very active, liquid futures market in the US has discouraged the same growth of swaps markets as seen in other parts of the world. This is especially true of gasoline, No. 2 oil and closely related products, although this is gradually changing.

Sources indicate that futures market liquidity allows them to adequately hedge forward positions and that swaps aren't necessary for all but the longer term deals, more than one or two years forward. And even then, the tendency is to make swaps settlement against the futures prices for those products directly trade there.

Platts is the most widely used settlement indicator for the related products, i.e. jet fuel, premium unleaded gasoline and even some naphtha.

Gasoline: Swap market 'protection' is also sought for seasonal products such as oxygenated vs non-oxygenated gasoline. These are infrequently more than one or two calendar quarters forward and often the trade is based on physical market spread relationships rather than outright prices.

Jet/Diesel: Jet fuel also trades most often at a No. 2 oil price relationship. Some airlines would be the noted exceptions, but there is not yet a clear direction on swaps versus futures hedging from the airline sector. The low sulfur diesel and low sulfur kerosene markets are too new to determine a trend.

Residual Fuel: The most active swap market in the US is for residual fuel. Residual fuel futures contracts have been listed on the futures markets, but have not been successful.

The most active swaps market is for 1.0% sulfur fuel with trade most often reported as "paper" for just the next forward month, or on a quarterly basis. Only an occasional one year deal is heard.

Second in popularity is the high sulfur 3.0% sulfur fuel oil swaps. Trade occurs on both US east and gulf coasts and mainly finds an outlet in the bunker resupply market.