Oil futures expected to appeal to speculators as well as businesses exposed to oil-related risks.
Oil futures, the latest derivative product to be introduced in the Thai market, are specially designed for two main objectives: short-term speculation, and a way to hedge risk for businesses that depend on oil.
Investors in oil futures need to have a knowledge of world economic trends and watch US dollar movements, says Globlex Securities.
The contracts made their local debut last Monday on the Thailand Futures Exchange (TFEX).
An oil-futures contract is an agreement to buy or sell in the future at a fixed price. The contract is subject to a daily settlement. The contracts on the TFEX are based on Brent crude, which currently is trading around $110 a barrel.
Each oil-futures contract means exposure or investment in 100 barrels of Brent crude worth around $11,000 or 330,000 baht. But investors are only required to pay an initial margin of 27,000 baht per contract.
“Oil futures are another choice for investors apart from oil stocks or oil funds. They help investors diversify their portfolios for investment stability over the long term with less money,” said Kesara Manchusree, the TFEX managing director.
For example, an investor with a 10-million-baht portfolio who buys one oil-futures contract will not lose much when the equity market falls because the two asset classes have a low correlation (see chart).
“He can either put the whole amount toward buying oil funds or buy one oil-futures contract for 27,000 baht to have exposure of 330,000 baht,” explained Ms Kesara.
“He can then park some of that 300,000 baht in a deposit account to earn interest. Investors can save around 50,000 baht if crude oil price is volatile.”
However, she noted the remaining amount should be put into another asset class so an investor’s exposure to oil is not overloaded.
But oil futures are also risky, as each contract carries exposure to 330,000 baht, not the 27,000 baht you put down, said Sanya Harnpatanakittpanich, head of derivatives at Globlex Securities.
He insisted discipline and effective capital-base management were required for investment in futures products.
“This product is not fit for someone without an investment plan and who is risk-averse. Medium- to long-term investors should also avoid futures products, instead focusing on mutual funds.” he said.
To invest with less pain, especially in the derivatives market, investors need to see an “exit” door when market conditions are not favourable. They should know when to take a profit or cut losses, he said.
Mr Sanya noted oil futures were good for short-term speculation and very useful to help hedge risk for businesses that rely on oil, such as logistics and manufacturing. Thai Airways International hedges its oil prices.
To invest in oil, he suggested, investors should have some knowledge about the macroeconomy in order to foresee demand and supply for oil. They should also know the trends of major currencies, especially the US dollar _ the core currency for oil trading.
Thai Oil’s website offers a daily analysis of the oil market, offering a shortcut for some investors.
Globlex Securities plans to be a market maker for a Brent crude futures products.
“The commodities market in Thailand is very small. This market can help small businesses a lot and that’s why our company will support commodities products,” Mr Sanya said.