TOCOM Oil Futures Underscore Japan's Bullish Bet

TOCOM crude volumes top annual, daily records; volumes boosted by Nomura's TOCOM-linked ETN.

Trading volumes of crude oil futures on the Tokyo Commodities Exchange (TOCOM) have more than quadrupled this year to a record as Japanese retail investors have started making bets that oil prices that hit an 11-year low this month will rebound.

Global oil prices have dropped more than two-thirds over the last 18 months, with international benchmark Brent sinking to $35.98 a barrel - lowest since July 2004 - after OPEC stuck to its policy of full production to retain market share.

Trading volume of TOCOM's Dubai crude oil futures have grown more than four-fold to a record 3.15 million lots over the first 11 months this year from the same period a year ago, already surpassing the previous annual record of 2.28 million of 2004.

Volumes got a further boost after OPEC failed to agree a production ceiling at its Dec. 4 meeting, with TOCOM daily crude volumes hitting a record of 55,388 and open interest soaring to 74,257 lots. That is against an average daily volume of 3,677 in 2014 and an open interest of 19,610 at the end of last year.

"The volume started rising late last year (2014) after oil prices had begun falling," said Hidefumi Moriyama, TOCOM's senior manager. The ballooning trade is also due to a spike in investments by individuals in an exchange traded note (ETN) that tracks TOCOM's oil futures, he said.

The ETN linked to TOCOM crude oil futures was created by Nomura Securities and listed on the Tokyo Stock Exchange in 2013. It is designed to offer leverage or double the impact of any price moves, according to Nomura.

"It's easier for individual investors to trade the ETNs than TOCOM oil futures as ETN is a listed product like stocks and investors have no need to deposit a margin or roll over," said Makoto Shiota, managing director of Nomura Securities.

To hedge its exposure on the exchange traded notes, Nomura trades oil futures in volumes twice as large as investors' ETN orders, boosting the activity of the TOCOM crude contracts.

Total value of the ETN had grown to 53.6 billion yen ($445 million) by last Friday, up from 2.9 billion yen a year ago, as Japan's retail investors bet on a recovery in oil prices.

TOCOM crude futures fell to a more than six-year low last week at 26,890 yen per kilolitre ($35.50 per barrel).

The TOCOM oil contract was initially launched with the aim of becoming a benchmark for Asian crude, like West Texas Intermediate in the U.S. market and Brent crude in Europe, but with it trading in yen and kilolitres, it has remain primarily an investment tool for the domestic Japanese market.

Reporting by Yuka Obayashi