What is the International Petroleum Exchange (IPE)?

The International Petroleum Exchange (IPE), established in 1980, was a London-based exchange for futures and options on several energy-related commodities. It has been a subsidiary of the Intercontinental Exchange (ICE) since being purchased in 2001 and is now known as ICE Futures.

Key Takeaways

  • International Petroleum Exchange (IPE) was one of the most significant markets for the trading of energy options and futures. It became known as the ICE Futures after its purchase by the Intercontinental Exchange in 2001.
  • The primary commodity traded through IPE was Brent crude, which, at the time, was the global benchmark for oil prices. Other trades the exchange handled include options and futures on oil, natural gas, electricity, coal, and fuel oil, as well as European carbon emission credits.
  • In 2005, the exchange moved from an open outcry system, where the floor traders execute orders with a system of hand signals, to an electronic trading system. Major competitors are the New York Mercantile Exchange, or NYMEX, and the Chicago Mercantile Exchange.

Understanding the International Petroleum Exchange (IPE)

International Petroleum Exchange (IPE) was one of the most significant markets for the trading of energy options and futures. It became known as the ICE Futures after its purchase by the Intercontinental Exchange in 2001. The new, ICE, has expanded its portfolio of futures offerings to include various energy products, including natural gas and electricity.

The primary commodity traded through IPE was Brent crude, which, at the time, was the global benchmark for oil prices. Other trades the exchange handled include options and futures on oil, natural gas, electricity, coal, and fuel oil, as well as European carbon emission credits. Today, ICE futures continues to handle these trades as well as more advanced derivatives and exotic options.

In 2005, the exchange moved from an open outcry system, where the floor traders execute orders with a system of hand signals, to an electronic trading system. Major competitors are the New York Mercantile Exchange, or NYMEX, and the Chicago Mercantile Exchange.

The International Petroleum Exchange, founded in 1980 by a group of energy and futures traders, was purchased in 2001 by the Intercontinental Exchange (ICE). The petroleum industry suffered from unprecedented volatility in the 1970s, due to political and military conflicts in the Middle East. The disruption in the global petroleum markets sent U.S. gasoline prices soaring, and its effects spread to other corners of the global economy.

Future Contracts were IPE's Bread and Butter

Futures contracts on underlying petroleum supplies allow producers and consumers to hedge their positions and protect themselves against future volatility. A futures contract is a legal agreement between two parties to exchange an agreed-upon asset for an agreed-upon price at a date in the future. The seller of the future has a short, or bearish view of the price direction for the underlying asset. In contrast, the buyer has a long, or bullish view. Futures contracts are quoted in U.S. dollars and cents and expressed in lots of 1000 barrels.

A consumer of unrefined crude oil who is worried about a future spike in crude prices might buy a contract (long) to purchase crude at a lower price. Any such agreement must include a counterparty who takes a short position. Naked short positions expose traders to significant risk if they need to go to the market to purchase oil to deliver to the long contract holder.

In addition to the oil producers and consumers active in futures markets for hedging purposes, speculators have joined the markets in search of profits from movements in oil prices. Rather than seeking to protect themselves from the uncertainty of future prices, these traders seek to capitalize on their predictions of price movements. While these individual trades have on impact on underlying commodity prices, large numbers of speculative trades can lead to price movements. Many researchers believe that oil speculation contributed to the sharp rise in oil and gas prices in 2006.