Trading the Oil Revolution

The New York Mercantile Exchange (NMX) is expanding to Dubai as the oil market turns to sour crude to quench some of the worldwide demand. To find out whether traders will pump money into the new Dubai oil contract – and to discuss the exchanges themselves - the guys brought NYMEX CEO James Newsome on set.

Newsome says the industry has been begging for this crude contract for 20 years. It hasn’t been until now that there is enough “legal and regulatory certainty” in the Middle East to set up the physical requirements for the contract, he says.

Around 60% of the crude oil that flows out of the Middle East is heavy sour crude, which goes mainly to China and India. Using sweet crude oil as a hedge has been imperfect for these purposes, Newsome says, which is why the sour crude contract will create a “perfect hedging opportunity.”

Moving away from oil, Newsome explains that the exchange business – made up of the likes of the NYMEX, NYSE Euronext (NYX), Chicago Mercantile Exchange (CME) and others – has proven to be a prosperous industry for shareholders. However, NYMEX stock hasn’t moved as much as the other exchanges after its initial spike directly following the company’s IPO. Newsome says NMX has traded between roughly $118 and $135, which is right in line with the company’s revenue and median revenue projections. And Eric Bolling, who works on the NYMEX floor as a commodities trader, says it was widely thought that if NMX shares could hit $115 within a year of the IPO, it would be considered a “great number.” The stock hit that target right off the bat and just hasn’t moved much since, he says.

And finally, considering the NYMEX’s physical proximity to the New York Stock Exchange in Lower Manhattan, as well as the move to an electronic-based trading model from a floor-based trading model, the question is inevitable:

Does the NYMEX have any interest in selling itself to the NYSE?

“Everything is on the table,” Newsome says.

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Trader disclosure: On May 31, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Bolling Owns (ICE), (NMX), Natural Gas, Sugar, Coffee; Najarian Owns (AAPL),(CLF),(DNDN),(MOS)