The Dubai Mercantile Exchange, may be setting new trading records but can it make real inroads in getting its Oman crude oil futures contract accepted as a leading benchmark for pricing oil deals?
For consumers, changing buying habits does not happen overnight. In markets, changing benchmarks is also a process.
In June 2007, the Dubai Mercantile Exchange (DME) launched its DME Oman Crude Oil Futures contract with the goal of establishing it as a leading benchmark. Unrest in the Middle East has proven to be a hurdle on the road to acceptance. Persuading Arab and Asian oil producers to sign on has also been a significant challenge.
Despite DME Oman’s status as the largest physically delivered crude oil contract in the world, the current standard for Middle East crude is the Dubai price assessment, which includes oil from the Dubai, Oman and Upper Zakum fields, published by Platts, the energy information division of the McGraw-Hill Companies.
“The DME’s Oman futures contract has had success as a physical crude trading mechanism,” according to Herbie Skeete, founder and managing director of UK based Mondo Visione, publisher of specialist exchanges information. “However, if the DME Oman is to become a very liquid crude oil futures contract, then major Mideast producers like Saudi Arabia would have to adopt it as a benchmark. For now, Saudi Arabia uses the Platts Dubai/Oman average to set official selling prices for crude oil sales to Asia.”
Saudi Arabia’s power to influence should not be underestimated. Three years ago, the country’s major oil producer Saudi Aramco switched from using light, sweet crude West Texas Intermediate (WTI) price from Platts for oil sold to the United States to, the Argus Sour Crude Index (ASCI), a new measure introduced by a rival pricing firm, Argus Media. The reason was that the ASCI better reflected the country’s heavy sour crude output than the WTI index. Kuwait and Iraq quickly followed suit.
Analysts believe Saudi Arabian producers would only be willing to make the switch if Asian refiners endorsed the change. Their reluctance to embrace the DME is partly due to the relative immaturity of the market as well as their natural conservatism. Equally as relevant is the lengthy time consuming red tape process involved in rewriting physical and paper contracts to change to a new benchmark.
Skeete says, “For the DME Oman to become the benchmark it will have to go beyond being a platform to trade physical barrels. It will have to attract more end–users who are looking for a futures market with contracts that are liquid throughout the day.”
For now, the major participants in the DME are Oman and Dubai who also happen to be shareholders. Following a restructuring of equity shareholding in February, a subsidiary of Dubai Holding owns 9 percent of the company and Oman Investment Fund owns 29 percent. CME Group increased its investment in DME from 25 to 50 percent in the restructuring, and strategic investors including Goldman Sachs, J.P. Morgan, Morgan Stanley, Shell, Vitol and Concord Energy account for 12 percent.
In 2011, the DME reported a record volume increase of 19 percent, delivering over 145 million barrels of crude oil led by its flagship DME Oman Crude Oil Futures. Average daily volume (ADV) came in at 3,505 contracts per day, peaking at 4,427 per day or the equivalent of 4.4 million barrels in July 2011. That figure held as a record until February this year when average daily volume for the month reached 5,378 contracts.
However, the figures still pale in comparison to the world’s two main heavyweight crude markers – WTI and North Sea Brent. For example, CME Group’s WTI futures topped a monthly average of 780,000 contracts, or 780 million barrels in November 2011.
The main distinguishing feature of the DME Oman is its effectiveness and popularity as a mechanism for buying and selling physical crude. DME boasted a record 15.4 million barrels of physical Oman crude for September 2011 – the equivalent of a remarkable 60 percent of Oman’s monthly crude and condensate production of 25.5 million barrels. Physical delivery volumes averaged 12.1 million barrels per month last year.
WTI also has a physical delivery component to its contract but its trading volume is many times greater, and producers, refiners and traders are all involved. Participation in the Oman contract by producers and refiners is limited, and its trade tends to be more concentrated.
The goal though is to cement the Oman contact as a leading benchmark and once that is successful, widen its remit to include other products such as jet fuel contracts. There is no timetable but the hope is that slowly yet steadily it will win the race.