Dubai: The Dubai Mercantile Exchange Limited (DME) announced on Sunday that cumulative trading on its benchmark DME Oman Crude Oil Futures Contract (DME Oman) had exceeded one million contracts, representing one billion barrels of crude oil traded, since its launch on June 1, 2007.
"At the close of trading on 27 November 2009, DME Oman had traded a total of 1,000,174 contracts, which at 1,000 barrels per contract is equivalent to more than one billion barrels of crude oil."
Since its launch, the DME Oman has emerged as a leading price discovery mechanism for the East of Suez crude markets. Reflecting the growing liquidity of its flagship contract, the DME reported a 60 per cent year-on-year increase in average daily volumes during 2009, averaging 2,037 contracts.
"This is a crucial milestone for DME and all our stake holders. This proves that we have got all our fundamentals right in creating a globally accepted benchmark in sour crude.
"The rising volumes are testimony to the market acceptability of DME Oman Crude Oil Futures Contract and the DME as a viable marketplace," Ahmad Sharaf, DME chairman, told Gulf News.
DME Oman is the largest physically delivered crude oil contract in the world. Physical deliveries of DME Oman have recently averaged 10 million barrels per month, achieving a record volume of 11.6 million barrels for September 2009 delivery. This development marks a 60 per cent increase in physically delivered volumes from August 2007 to the present.
"This [the volumes] reflects the growing acceptance of the DME Oman Crude Oil Futures Contract among key energy traders and hedgers, particularly in the key AsiaPac region. We look forward to continued successful co-operation between our organisations," said Craig Donohue, chief executive officer of the CME Group.
Liquidity boost
Leveraging on its experience in developing a market and a regionally rele-vant physical benchmark, DME is now seeking more regional oil producers to join the market to boost its liquidity.
"Ever since our launch we have been in regular dialogue with all the leading regional oil producers to get them on board our market platform," Sharaf told Gulf News.
The participation of some of the big national oil companies (NOCs) in the region — from Saudi Arabia, Iran and the UAE — is crucial to the DME's success as the leading market place and the DME Oman contract as a key benchmark for the region's oil exports to Asia.
Industry analysts said that big players were waiting for the DME and its benchmark to achieve a critical minimum liquidity.
"The big NOCs are closely monitoring our progress. If one of them makes the first move it will be easier to get the others on board. However, this is a sovereign call and until that happens we need to work patiently," Sharaf said.
DME Oman is currently the benchmark for two major regional crudes — the Dubai and Oman crudes — while Platts' Dubai and Oman assessments are used in pricing formulas by other major Gulf producers, including Saudi Arabia.
Since the start of this year, DME Oman has on average traded 2,037 contracts (which is more than two million barrels) per day.
Volumes had hit a record 8,076 lots on June 23 after Dubai said it would start setting the official selling price of its benchmark crude in relation to Oman oil futures, before falling to between 1,000 and 3,000 lots a day over the past few months.
"The DME continues to go from strength to strength. This time last year we were announcing more than 500,000 contracts traded in the 18 months since launch.
"Just 12 months on, we have succeeded in doubling that volume to one million," said Thomas Leaver, chief executive officer of the DME,
Spot marketing
Gulf crudes are priced in the Asia spot market using Platts' Dubai crude assessment and Oman futures.
DME Oman offers vastly improved liquidity over Platts partials assessment. DME Oman's link to physical 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.
"The product we have created at DME is a genuine market benchmark backed by physical trading. Secondly, this benchmark is for a commodity that did not have a benchmark for a long time.
"There was no political push to create this market, rather it was based on a genuine need to create a transparent market place. We believe that as volumes grow more players will join the DME," Sharaf said.
From January next year Saudi Aramco, Saudi Arabia's state oil company, will begin using the Argus index to price oil sold in the United States, rather than a formula based on CME's West Texas Intermediate (WTI) oil futures contract.
As 60 per cent of Saudi Arabia's customer base is in Asia, oil market analysts believe that it is the right time for the Gulf producer to move to a price discovery mechanism based on DME Oman differentials.
Though a relatively new exchange, the DME has all the right credentials. While it is majority owned by the CME Group, Dubai Holding subsidiary Tatweer and the Oman Investment Fund, major market participants including banks and energy trading firms such as Goldman Sachs, Morgan Stanley, JPMorgan, Vitol, Shell, Casa Trading and Concord Energy collectively own up to 20 per cent of the bourse.
Trading on the DME is subject to robust regulatory oversight by DFSA and, through its NYMEX clearing arrangement, the CFTC.
New deals in pipeline
The Dubai Mercantile Exchange is planning to offer a range of new Oman crude oil trading products in the first quarter of next year to boost volumes on the exchange.
The exchange has sought preliminary approval from the US Commodity Futures Trading Commission (CFTC) for a total of four swaps and options contracts and is awaiting feedback for the formal submission.
The DME intends to launch four new contracts in the first quarter of 2010 linked to the existing flagship contract, DME Oman Futures. The range of new contracts include DME Oman Swap, DME Brent-Oman Swap, DME Oman Average Price Option, and DME Oman European-style Option, subject to the final clearance from CFTC.
The goal behind launching these contracts is to provide market participants with a comprehensive and flexible suite of products to facilitate risk management/hedging.
Volumes in the new contracts are expected to build up as DME Oman becomes the established pricing benchmark.
