The Futures in Oil

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Dubai has taken another giant step forward in its campaign to make the emirate one of the world's financial centres, though this time the leap involves a product traditionally associated with the region: oil.

On June 1, the Dubai Mercantile Exchange (DME) launched its oil futures market, challenging the long-standing monopoly of major futures trading markets in New York and London. In so doing, the DME became the first energy and commodities futures exchange in the Middle East.

Initially, the DME is trading three contracts. One is a physically delivered Oman crude oil futures contract, and the other two, a Brent-Oman spread contract and a spread contract between Oman crude and West Texas Intermediate light crude, both being financially settled contracts.

On the first day of trading, which saw a turnover of just under 3m barrels of oil, representing some 2800 contracts, the benchmark Oman Crude Oil Futures Contract (OCOFC) was being traded at $64.09 a barrel.

The opening of the oil futures exchange came after almost three years of work by experts studying the Middle East sour crude market and extensive consultations with potential clients and traders.

Ahead of the launch of the DME's oil futures market, the Oman Investment Fund (OIF) announced it had purchased a 30% stake in the exchange, joining founding partners Tatweer, a unit of Dubai Holding, and the New York Mercantile Exchange operator Nymex Holdings Incorporated.

Saeed al-Muntafiq, the chairman of Tatweer, said that having OIF buy into the exchange was a further validation of the DME's strong and visionary business model.

"Oman's confidence and support for the DME, as reflected by this announcement and the continuation of Dubai's role in developing this exchange, underscore the true significance and impact the DME is expected to have on the future pricing of Middle East sour crude oil," al-Muntafiq said on May 27.

The DME will have some competition apart from the majors, with the Intercontinental Exchange (ICE) launching a Dubai crude oil futures contract on May 20, with the prices linked to energy pricing agency Platts' assessed rates. However, with Oman throwing its weight behind the DME, the Dubai exchange won a powerful ally, one that could bring other Gulf states to its side.

The exchange got a further boost on May 30 when the government of Dubai, at the directive of the emirate's ruler, Sheikh Mohammed bin Rashid Al Maktoum, announced that it would no longer set its export price for crude oil sales through the present policy of using daily market assessments by Platts, instead adopting the DME's futures prices.

Gary King, DME's chief executive officer, said the new futures exchange had received strong acceptance from the industry, with some 60 traders already approved by the DME's membership committee.

"DME's customers know that the contract's deliverability provides true price convergence between the cash and physical markets," he said on June 1. "This is especially advantageous in Asia, which imports more than two thirds of its crude oil from the Middle East and has long sought greater price transparency and better risk management tools."

The DME has no intention of confining itself to oil futures, with work already underway to put in place an aviation fuel contract by the end of the year.

Ahmad Sharaf, the chairman of the DME, said that while the exchange was set up with energy contracts in mind, it had the flexibility to offer other commodity futures contracts.

"We would also look at developing commodities contracts that are relevant to the region, however, our focus will be on the wholesale global market," he said in an interview with the local press on June 4.

Another option the DME has been considering is contracts for Middle East natural gas, along with other commodities, according to James Newsome, chief executive of Nymex.

"We're looking at and evaluating a number of contracts," Newsome, said on June 1. "We're looking at metals contracts, Middle East natural gas, but we're completely focused on crude for the launch."

Here too there could be competition, with Qatar, the region's leading gas producer, planning to launch a liquefied natural gas contract on its International Mercantile Exchange later this year.

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