A new way to play Alberta crude

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The world's top futures exchange will add its first Canadian oil contract later this month as Alberta's fast-growing oil sands command an increasingly important role in energy markets.

The CME group, which owns the New York Mercantile Exchange, will launch a cash-settled futures contract for Western Canadian Select heavy crude on July 28, an important step for Alberta's oil sands on to the global stage.

"There's no secret in the U.S. energy markets how important [the oil sands]are, both to refiners and to end users," said Joseph Raia, CME's New York-based managing director of energy and metals, who came to Calgary this week to market the product to the city's oil patch.

The major question is, will anyone want it? The CME contract is not the first of its kind; the Montreal Exchange launched a similar Western Canadian Select (WCS) product on June 18, but it hasn't been a runaway hit.

"The contract has not yet traded," said Carolyn Quick, director of corporate communications with Montreal Exchange owner TMX Group. "We are now focusing our efforts on training and educational efforts and we expect a progressive build up of this new market."

Western Canadian Select producers have been cool to the new CME product. Talisman Energy Inc., for example, said that it has no intention of helping boost the contract's liquidity.

Elsewhere, smaller contracts have become important innovations: the Dubai Mercantile Exchange's Oman crude oil futures contract, for example, has delivered more than 235 million barrels of crude since its inception in June 2007.

But CME has no committed volumes for the WCS contract, and has warned it could take time to develop. And traders are far from bullish on the CME contract, saying that while it is sensible, success is not certain, given that markets have historically preferred established contracts such as West Texas Intermediate (WTI) and Brent crude.

Both the new Montreal and New York Western Canadian Select futures products have a similar aim: to capitalize on a perceived need for a better financial instrument to trade Canadian crude, at a time when Alberta alone has surpassed all other countries as the largest source of U.S. oil imports.

"We truly believe that we're at the cusp of an explosion in trading volumes in Alberta," said Tim Gunn, chief executive officer of Net Energy Inc., a broker whose platform trades nearly one million barrels of oil a day, and whose index will form the basis of the new CME product.

One reason is the financial exposure Canadian oil producers must currently endure. Companies regularly hedge their production, meaning they contract to sell future production at a certain price. Today, they can do that by buying futures of WTI, the U.S.-based benchmark for intermediate oil.

Because WCS is a heavy oil that contains sulfur, it takes more effort to refine into end products such as gasoline or jet fuel, and therefore trades at a discount to WTI. Companies currently have no way to shield against those moves, which can be problematic because the discount can change quickly.

The CME contract, which is based on the heavy product coming out of Alberta's oil sands will give them that ability.

"It is a massive change," Mr. Gunn said.

"If this thing starts trading actively it can lead to all types of other vehicles. We could start an options market here. We could get an ETF on Canadian oil sands," he said. "This puts us on the map. We're in the big leagues now."