International Petroleum Exchange (IPE): What it is, How it Works

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: 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.

Why was having an IPE Important?

The International Petroleum Exchange (IPE) was important because it provided a platform for global energy market participants to hedge their risks and manage their exposure to price volatility in the energy markets. Also the IPE provided transparency and liquidity, allowing buyers and sellers to come together to trade oil and other energy products.

What Types of Securities were Traded on the IPE?

The International Petroleum Exchange (IPE) traded a variety of energy-related securities including crude oil futures and refined products futures such as gasoline, heating oil and diesel. Also, on the IPE natural gas futures were traded.

Futures were not the only derivatives that were traded on the IPE. Energy options were traded as well.

How did the IPE Operate?

The International Petroleum Exchange (IPE) operated as an open outcry exchange. This means that buyers and sellers met in person on the trading floor to negotiate prices. Later on, electronic trading platforms were developed. This allowed participants to enter orders into the platform via computers.

Also, the IPE had a clearinghouse that guaranteed the performance of all trades. This meant that buyers and sellers could be confident that their trades would be executed and that they would not lose money if the other party did not fulfill their obligations, mitigating counterparty risk.

Why is the IPE no longer in Existence?

The International Petroleum Exchange (IPE) was acquired by the Intercontinental Exchange (ICE) in 2001, and the IPE ceased to exist as an independent exchange in 2005. The acquisition by ICE was a strategic move to expand ICE's global footprint and increase its market share in energy futures trading. The IPE's expertise in energy futures, combined with ICE's technology and resources, helped to create one of the world's largest energy futures exchanges.

The Bottom Line

The IPE was a leading energy futures exchange that operated in London, UK. It provided a platform for trading standardized futures and options contracts for a range of energy products, including crude oil, natural gas, and refined products. The IPE played an important role in facilitating risk management, price discovery, and liquidity in the global energy futures markets, and its Brent crude oil futures contract became a widely used benchmark for pricing crude oil.

The IPE was acquired by the Intercontinental Exchange (ICE) in 2001, and its products were rebranded under the ICE Futures Europe name. The IPE ceased to exist as an independent exchange in 2005.