After years of planning, the Dubai Mercantile Change (DME) opened for buying and selling on June 1 with its flagship Omani crude futures contract. It’s a collaborative effort bringing collectively Tatweer, a unit of Dubai-government-owned Dubai Holdings, the New York Mercantile Change (Nymex) and the Sultanate of Oman.
The DME’s mission assertion and declared rationale is to bridge the hole between worldwide pricing mechanisms for candy, or low-sulfur, crude and the Gulf’s extra sulfuric (bitter) oil, particularly for commerce with Asian oil consumers.
The value of bitter crude from the Center East is at the moment set in reference to inappropriate benchmarks — futures contracts for very totally different merchandise traded on the world main commodities exchanges, Nymex and London-based Intercontinental Change (ICE).
The thought of building a platform for setting its personal benchmarks, enhancing income, and managing threat within the commerce of Center Japanese oil shouldn’t be new, it has simply by no means labored earlier than.
A part of Dubai’s objective as monetary heart
This dream to host the oil futures benchmarking is tied to Dubai’s objective of claiming the function of economic heart between East and West via the Dubai Worldwide Monetary Centre (DIFC). At its inception in 2002, the DIFC was labeled as software to spice up the contribution of the monetary trade to the emirate’s GDP from 11% in 2001 to about 20% in 2010. Whereas the DME makes reference to this goal in paperwork on its web site, it didn’t state how giant a job the alternate aspires to play on this mission.
Being the middle for bitter crude futures commerce may show to be profitable, provided that the DME’s charges per commerce are round $1. Brent (ICE) and West Texas Intermediate (Nymex), at the moment see each day volumes common round 150,000 trades.
The worth of getting a job within the futures contracts for Center East oil was underscored by the ICE when it beat the DME to the punch by launching an identical contract on Could 21 to immediately compete with the DME. There’s, nonetheless, a significant distinction in that the ICE bitter crude contract is cash-settled whereas the DME’s contract is bodily — precise barrels — settled and backed by the governments of regional oil producers. (Though solely about 5% of physically-settled futures contracts end result within the purchaser truly taking the bodily product).
Excessive each day volumes are the spine of a futures contract, which is actually an settlement to purchase a commodity later at a locked-in value. Due to this fact the 100 contracts, or heaps, a dealer buys on Monday at $68 every may be bought on Tuesday if the commodity’s value climbs.
Any futures alternate is, nonetheless, extraordinarily risky and contracts are traded rapidly, usually to maximise revenue (versus traders within the equities market who usually maintain an funding for an extended time period). Merchants need to have the ability to get out and in of contracts at a second’s discover.
This liquidity, nonetheless, is the aspect earlier Center East oil contracts have failed to understand. Muted dealer curiosity that stored liquidity low killed the primary bitter crude futures contract launched in Singapore in 1990. The flops that adopted have both utterly failed or traded in such low volumes they haven’t reached the standing of a value benchmark.
A Nymex solo try at a bitter crude contract, launched in 2000, solely noticed two days of buying and selling however remained listed for a 12 months. The DME partnership is Nymex’s fourth sortie into the bitter crude futures area, whereas the ICE is making its first sprint into this market, though it did, nonetheless, purchase the Worldwide Petroleum Change in 2001, whose try at a Center East crude futures contract had turned bitter in 1991.
On the DME, contracts are traded for supply two months sooner or later. In its first month of buying and selling, 39,571 Oman crude oil futures contracts modified arms — the equal of almost 40 million barrels. This was barely decrease than the rival contract launched by ICE, which noticed over 50,000 futures contracts, equal to over 50 million barrels, commerce in its first month.
In an try and keep away from the plague of illiquidity that downed different contracts, the DME has instituted a market maker program. This widespread follow brings trade heavyweights (like merchants and funding banks) to spice up liquidity ranges, providing money incentives to extend each day buying and selling volumes to the 20,000 mark, after which, based on the DME’s web site, this system will tail off.
Nonetheless too early to inform
“The preliminary goal determine talked about by the DME was 20,000 heaps per day and whereas volumes have been moderately promising to begin with, liquidity has since declined to below 1,000 heaps on some days,” commented Paul Younger, govt oil pricing editor for Asia with the commodities pricing agency Platts. “However it’s nonetheless means too early to present an total verdict on the success of the contract and the DME is launching new initiatives supposed to enhance liquidity.”
“The Asian market welcomes the DME as a extra clear benchmark for pricing functions. I believe liquidity degree at this level stays a problem, however it’s nonetheless early days for the alternate,” Victor Shum, a Singapore-based vitality marketing consultant with the agency Purvin and Gertz, advised Govt. “I believe the final sentiment appears to be, ‘Properly, let’s take a wait and see angle.’ I believe the DME has the weather there to achieve success. I believe most merchants want to see rising liquidity.”
Gary King, DME’s chief govt workplace emphasised the contract’s revolutionary parts when giving his outlook on the contract’s future. “We determined to align ourselves with a Center East oil producer,” King advised Govt a number of days earlier than the June 1 launch. “Nobody’s ever executed that earlier than.”
King mentioned market analysis revealed prospects who wished a bodily delivered contract and never the standard cash-settled contracts and the contract launched in Could by ICE. This gives a direct hyperlink between the paper market of the futures contracts and the bodily commodity. In a bid to satisfy what King described as market demand, the DME got down to discover a producer to accomplice with for the bodily supply.
Oman introduced earlier than the contract’s launch that it could base the value of all of its crude on the DME contract value, beginning this month. In late June, in a transfer apparently timed to supply one final burst of excellent PR earlier than the launch, the Dubai authorities, which basically has a couple of one-third stake within the bourse, made the identical announcement relating to its oil contracts two days earlier than buying and selling started.
Authorities backing from producer nations for the contract will definitely assist lend it credibility, however the alternate has solely rallied two middle-weights — Oman and Dubai — in a area of heavy-weights, John Sfakianakis, chief economist with Saudi Arabia’s SABB financial institution, advised Govt.
Oman has 5.5 billion barrels of oil, based on estimates from the U.S. authorities’s vitality info company. That’s the second lowest degree of reserves of the six Gulf Cooperation Council international locations behind Bahrain with lower than one billion barrels.
The company’s figures estimate the UAE has 97.8 billion barrels, however UAE authorities web sites put Dubai’s share close to 4 billion in 1991. Abu Dhabi sits on an estimated 94% of the nation’s reserves.
Some are being omitted
“I’m a little bit bit skeptical as a result of Abu Dhabi must be a pure participant on this,” mentioned Sfakianakis mentioned. The DME has approached different regional producers, however got here again scant on direct commitments.
“We’ve talked to all of them, and I believe the proof is as we go ahead, the objective is to get the contract accepted as regional benchmark and total the final word objective is to get it accepted as a worldwide benchmark,” King mentioned in an interview the day the alternate opened.
“I believe what’s accepted is that it’s essential to get first three contracts buying and selling, reveal they commerce in a strong vogue, that they’re liquid and that you simply get efficient value discovery,” he added, referencing the 2 money settled futures contracts which might be spreads between the Oman crude value and the costs of WTI and Brent.
However what of Saudi Arabia, the 800-pound gorilla, which holds the second-largest oil reserves on the planet? “In the intervening time you’ll be able to safely say that Saudi Arabia shouldn’t be concerned,” Sfakianakis mentioned.
An alternate of their very own
Given the targets of different GCC nations to energy up their very own monetary hubs, it’s attainable that larger producers haven’t proven the urge to decide to the DME bitter crude contract, as a result of they want to run a benchmarking alternate themselves .
One contender is Qatar’s IMEX, which has simply appointed its first CEO. The alternate has been rumored to look longingly at bitter crude contracts, along with jet gasoline and liquefied pure fuel futures. IMEX, identical to DME, shouldn’t be but letting on what futures it plans to introduce within the coming months.
Aggressive pressures however, Dubai’s monetary providers sector is an undisputed pillar for the economies of each the emirate and the GCC, now and in future. The query is that if it is going to be the Gulf’s sole central monetary market place. In response to numbers launched in June by the Dubai Chamber of Commerce and Business, finance in 2006 contributed to about 10% of the emirate’s quickly increasing GDP — and thus must considerably outpace different progress sectors inside Dubai if it truly is to provide 20% of the emirate’s GDP within the subsequent decade.
The DME’s instant issues might be for creating its merchandise and shopper base past the reductions it supplied merchants within the startup section. Since early 2006, there’s been speak of a jet gasoline futures contract, and King has mentioned in interviews through the DME launch that this may very well be working by 12 months’s finish. He added that the alternate is eager on buying and selling different commodities however was reluctant to present particulars.
“The market doesn’t take prisoners. We’re holding most of these concepts near our chests in the mean time,” he advised Dow Jones on June 1.
Diversifying or bringing different producers on board or just securing pricing agreements can be a boon for the nascent alternate, however shouldn’t be an absolute make or break necessity. In the long run, analysts argue the market is prepared for change, however is there room available in the market for 2 or extra bitter crude contracts?
“Probably not,” says Michael Davies, senior analyst with the London-based futures brokerage agency Sucden. “At this early stage, there must be a deal with one.”
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