New Canada heavy oil contract seen aiding hedging

* New contract seen removing some hedging variables

* CME and Net Energy, Montreal Exchange launch contracts

* Moves reflect growing role of Canadian oil in U.S.

By Jeffrey Jones

CALGARY, Alberta, July 22 (BestGrowthStock) – A new index futures
contract for Canadian heavy crude oil should simplify hedging
for companies forced to deal with wildly fluctuating price
spreads against light oil, one of its developers said.

CME Group (CME.O: ) and Calgary-based Net Energy Inc
introduce the contract for Western Canadian Select next week,
as they try to capitalize on the growing U.S. reliance on
Canadian heavy oil.

Energy companies have had to devise hedging strategies
solely against benchmark West Texas Intermediate crude, leaving
variables such as the fluctuating price discount on heavy crude
and changing Canada-U.S. dollar exchange rate at play.

“Now they’ll be able to go out and do an exact hedge
instead of having something that’s pretty close but not really
close,” said Tim Gunn, chief executive of Net Energy, which
runs a Canadian electronic crude oil trading system.

Heavy crude, which makes up the majority of Canadian oil
production, is discounted based on supply, demand and the extra
costs of processing it into gasoline and other petroleum
products.

Western Canada Select is a blend of conventional heavy
crude and tar-like bitumen mixed with synthetic oil from
Alberta’s oil sands as well as condensate.

Canada is already the largest crude supplier to the United
States and recent and planned pipeline expansions into the U.S.
Midwest and as far as the Gulf Coast are boosting the
importance of the supply to U.S. refiners.

CME, which runs the New York Mercantile Exchange, and Net
Energy are not the only group trying to take advantage of the
market growth.

Montreal Exchange, run by TMX Group (X.TO: ), launched a
Canadian heavy crude contract (WCHc1: ) in June, although no
contracts have traded yet. The contract is cash-settled using
the Western Canada Select-West Texas Intermediate index
reference price calculated by NGX, another TMX unit.

There have been several attempts over the years to launch
new crude contracts around the world beyond the industry
benchmark NYMEX WTI and London Brent crudes, but lack of
trading volume has hampered them [ID:nN19211224].

That is the biggest risk for the Western Canada Select
contracts, analyst Martin King of FirstEnergy Capital Corp
said.

“The key is liquidity and I am sort of skepical to some
degree that, even though the overall production volumes of that
(crude) stream might be rising, that you’ll get enough
liquidity in the forward markets,” King said.

Gunn said the Canadian oil market has matured to the point
where the Western Canada Select contract should take off.

“There are a lot of new players that have come in in the
past two to three years, like the banks which actually own
physical assets now. They are very familiar with financial
products,” he said.

Stock Market Basics

(Editing by Peter Galloway)

New Canada heavy oil contract seen aiding hedging