Completing four years in operation today, the Dubai Mercantile Exchange (DME) is confident of evolving its flagship marker, DME Oman as a legitimate delivery-backed oil benchmark for the largest oil producing region in the world, Thomas Leaver, Chief Executive of the DME, told Gulf News in an interview.
Average daily volumes (ADV) for the DME Oman crude oil futures contract (DME Oman) through the first quarter stood at 3,000 contracts (equivalent to 3 million barrels of oil per day). Sustained liquidity and continued growth enabled the DME to set a new trading record in January, with an ADV of 3,570 contracts, the highest monthly figure since trading began on the DME in 2007.
Although the exchange experienced high volatility and reduced volumes in April, Leaver said DME volumes picked up momentum in May.
DME Oman is now the sole benchmark that determines the official selling price (OSP) for all Oman and Dubai crude oil exports. Platts Dubai and Oman assessments are used in pricing formulas by other major Gulf producers.
"DME Oman offers vastly improved liquidity over Platts partials and such other assessments. DME Oman provides a direct link to market supply/demand fundamentals in the East of Suez region. Trades based on Platts partials rarely go to physical delivery," Leaver said.
Benchmarks facilitate price discovery, price risk management and the reduction of basis risk for a specific region. Crude oil streams significantly vary in their characteristics in any given region but pricing any one in relation to another benchmark provides market efficiencies for pricing various streams linked to the same supply/demand fundamentals.
A benchmark price is used as the basis for pricing other crudes sold in a given region, adjusted for quality variability and other market factors.
In Western markets benchmark prices are principally based on trading on regulated exchanges such as WTI (West Texas Intermediate) on CME and Brent on Intercontinental Exchange.
However, East of Suez benchmark prices (Dubai, Minas) have historically been assessed, by journalistic agencies, based on over-the-counter transactions. The launch of DME Oman in 2007 brought an exchange-trade benchmark to the region.
Dubai's decline in production and lack of liquidity in partials (paper trade) make it difficult for agencies to provide accuracy in their price assessments.
"The illiquidity of partials has led to increased reliance on other market indicators which may not appropriately reflect actual trading and/or regional supply/demand dynamics. Agencies' assessments are impacted by participants trying to influence price setting rather than actually buying and selling oil," Leaver said.
DME Oman prices simply reflect actual trading. DME Oman's daily settlement is just the weighted average of the price at which contracts, linked to physical, are bought and sold during a defined time period.
DME Oman is already the sole benchmark for Dubai and Oman crude supplies, the two primary markers for East of Suez markets.
The adoption of DME Oman by other regional national oil companies will further enhance its legitimacy as a regional benchmark.
"The growing strength of our trading volumes demonstrates the essential role that the DME plays in delivering transparency and security to our customers," Leaver said.
Market interest in the exchange was further enhanced through the launch of two new DME-Oman linked contracts by the CME Group in February, namely DME Oman Crude Oil vs Dubai (Platts) Swap Futures Contract and ICE Brent (Singapore Marker) vs DME Oman Crude Oil Swap Futures Contract.
Both contracts are cash settled and build on six other DME-Oman linked cash contracts launched in December 2010.
Leveraging physical strength
DME Oman continues to demonstrate a strong link to the underlying Oman crude physical market and is the largest physically delivered crude oil futures contract in the world.
"About 25 per cent of our contracts are physically settled. To that extent it is the largest physically delivered sour crude futures contract in the world," said Thomas Lever. Unlike other regional crude streams, both Dubai and Oman crudes are outside the Opec quota limits and are sold with no destination restrictions, allowing the establishment of secondary markets needed for transparent price discovery.
In 2010, DME recorded an average daily volume of 2,898 contracts (equivalent to 2.9 million barrels per day), and a high of more than 3,000 contracts per day during the fourth quarter. While more than 140 million barrels of crude oil were delivered through the DME during 2010, the bourse set a record for physical delivery in September 2010, with 15.1 million barrels. In June 2009, the Government of Dubai joined the Sultanate of Oman through its adoption of DME Oman as the sole benchmark for its OSP providing a significant boost to the contract's long-term viability.
From January last year Saudi Aramco, Saudi Arabia's state oil company, has been using the Argus index to price oil sold in the US. 60 per cent of Saudi Arabia's customer base is in Asia, oil market analysts believe it will be in its interest to move to a transparent price discovery mechanism based on DME Oman differentials.