The New Oil Benchmark for Asia

 

The 2014 version of BP’s Energy Outlook 2035, the authoritative look into the future and now into its fourth year, again highlighted the changing face of global energy markets and the fundamental shifts we will see over the next two decades.

Of course the report confirms what everyone already knows – that energy demand in the East is soaring. The numbers are truly staggering; while the report sees primary global energy demand growing 41 percent by 2035, some 95 percent of that increase will come from emerging economies – with Asia leading the expansion. BP notes that by 2035, Asia will account for 70 percent in inter-regional energy net imports – establishing Asia as the key region for price discovery.

This can mean only one thing – Asia and the Middle East will move from largely passive price takers to establishing their own pricing benchmarks, with liquid and transparent markets across the commodities sector.

The Dubai Mercantile Exchange (DME) Oman Futures Contract is already proving to be a trailblazer in that area, establishing itself as the first East of Suez crude oil futures market in a region that has historically lacked its own primary price benchmark.

WTI acts as the crude oil benchmark in the Americas and that role is set to grow on the back of the shale revolution, while Brent is the traditional reference price for Europe/Africa, and in more recent years has filled the void left by Tapis and Minas for light sweet crudes in Asia.

DME Oman is the third of the three global crude oil benchmarks and is the most relevant to the rapidly growing East of Suez market since it is the only contract which truly reflects the economics of the Middle East and Asia. Significantly, 40 percent of crude traded on the Exchange goes to China.

Apart from being the world’s largest physically delivered crude oil futures contract with 13 to 15 million barrels of oil delivered each month, the DME Oman also sets the export price of crude oil produced in Oman and Dubai.

The DME is the only exchange capable of bridging the expanding crude oil corridor that links the Middle East and Asia. Healthy volumes, an Asian presence with a newly established Singapore office and the addition of new Asian trading members – Reliance Industries Limited (RIL), Mitsubishi Corp  and Marubeni all joined during the past year – validate DME Oman’s position as the only quality benchmark for Middle East sour crude oil trading in the Asian markets.

Average daily volume (ADV) has grown steadily since the DME was launched in 2007 to reach 6,355 in 2013 – over double the 2010 yearly ADV – and the Exchange’s best performance to date.

The start of this year has seen DME set new volume records once more.  And the DME is well positioned to have a highly successful 2014 as it looks to provide participants with both a transparent price discovery mechanism and strong liquidity to enable hedging activity. If BP is right and Asian demand will drive the crude oil markets for the foreseeable future, then DME would appear to be in the right place at the right time.

 

 

is Managing Director of Energy Research and Product Development at CME Group. He is based in London.

Additional Recent Articles in Products