Futures Markets Jockey for Benchmark

Saudi Arabia's decision to start using a new benchmark to price the oil it sells to the U.S. is setting up a battle between the two leading commodities exchanges, each hoping to become the dominant market for derivatives linked to the new benchmark.

IntercontinentalExchange Inc. and New York Mercantile Exchange parent CME Group Inc. are both launching crude-oil futures contracts based on the Argus Sour Crude Index, the index that Saudi Arabia is adopting for its U.S. oil sales in January. Saudi Arabia, which supplies about 5% of U.S. oil demand, had previously used West Texas Intermediate, or WTI, crude delivered in Cushing, Okla., as its benchmark. WTI is issued by Platts, a unit of McGraw-Hill Cos.

Saudi Arabia's move may create demand for new derivatives linked to the Argus index, a previously little-used benchmark that is based on lower-quality oil produced in the Gulf of Mexico. The index was launched in May by London-based energy-market information service Argus Media Ltd.

The exchange operators are quickly rolling out the new derivatives to hold on to Saudi Arabia's U.S. customers, who use futures to reduce the risk from the fluctuating price of physical oil. Futures tied to high-quality WTI wouldn't provide the same protection for low-quality oil priced with Argus. Companies would likely have turned to custom, off-exchange derivatives had CME and ICE not acted. Both earn 6% to 8% of revenue from futures linked to WTI, according to Fox-Pitt Kelton.