Saudis certain to adopt DME crude benchmark

Singapore/Dubai: Saudi Arabia is all but certain to adopt the Dubai Mercantile Exchange's (DME) Oman crude oil futures contract as its benchmark one day, oil traders say. Now the main question is when, not if, it makes the switch.

The growing confidence that state exporter Saudi Aramco will eventually abandon the Dubai/Oman crude assessment price as its basis for Asian exports is bolstered by two things: the tone of recent discussion between Aramco and its customers; and its abrupt switch to a Gulf sour crude benchmark for all US sales.

But because of nagging concerns — including the relative illiquidity of the DME market, the large share of production held by a single company and the lack of substitutability — traders appear undecided about when such a transition would occur.

Bets on 2011

In a Reuters straw poll of 12 traders and refiners, who represent about a tenth of Saudi crude shipments to Asia, two said they expect the kingdom to make the change next year, one said 2011, and four said it could happen around 2012.

The rest declined to give a definite answer on timing, but nine of the 12 agreed that Aramco would likely change the way that nearly half of Asia's crude oil is priced, addressing years of concern over dwindling liquidity in the existing Dubai marker and allowing refiners to hedge their exposure on an exchange.

"I will say next year or never. There is a limit to how long you can give the patient mouth-to-mouth," said one trader.

A Saudi move to price off the DME — which would almost certainly be followed by Kuwait, Iraq and Iran — would likely make it the benchmark for some 12 million barrels per day (bpd) of Gulf crude exported to Asia.

China and India are expected to take a much larger share of future world oil demand.

Asian market

About half of Saudi oil exports are shipped to Asia and this is set to rise.

It would also provide a much-needed liquidity boost for the DME, which has struggled to expand activity beyond a handful of traders, producers and refiners who mainly use the market as a way to sell or procure physical supply, not to hedge.