Dubai Oil Trading Is Entrenching Itself
Friday, January 22, 2010

The Dubai Merchantile Exchange, which trades oil, has reported a positive year for 2009. Liquidity has increased with trading volumes achieving a 69% year-on-year increase and average daily volumes approaching 3,000 lots in the last quarter. The DME achieved a record delivery of 11.6 million barrels in September.

DME says that the adoption of DME Oman as the basis for setting the Official Selling Price (OSP) for Dubai crude by the Dubai Department of Petroleum Affairs in June 2009 further reinforces the growing acceptance of the DME Oman contract as the third global crude oil pricing benchmark. And fourthly, DME contracts were migrated seamlessly onto CME Globex® thereby allowing market participants to access the world’s three crude oil benchmarks on a single electronic platform.

The DME's annual report notes that through the course of the year there was a significant narrowing of the differentials between light sweet crudes such as Brent with more heavy and sour crudes such as Oman. Although the sweet-sour differential has been volatile, the typical price differential between Brent and DME Oman (see exhibit 2) has more than halved between an average of $1.1 in the first half of 2009 to $0.47 in the later half of the year. This spread reduction is significant when compared to the long-term average differentials of around $3/bbl (for the period 2000 – 2007).

Since its launch DME Oman has continued to demonstrate its fundamental grounding in the supply/demand balance of the region and is today considered the largest physically-delivered crude oil futures contract in the world, with an average of 8.7 million barrels delivered each month through the Exchange.

As part of its proposition to provide market participants with a flexible and comprehensive suite of trading and hedging tools, the DME intends to launch four new DME Oman related contracts in 2010:

• Oman Swap: a cash-settled, cleared-only contract that is settled on the monthly average of daily DME Oman settlements
• Brent-Oman Swap: a cash-settled, cleared-only contract that is settled on the monthly average differential between ICE Brent and DME Oman daily settlements
• Oman Average Price Option: a cash-settled, cleared-only options contract that is settled on the monthly average of daily DME Oman settlements
• Oman European-style Option: a cash-settled, option that will be available for trading on CME Globex© and for clearing. It is settled against the post-close price of DME Oman upon expiration.

The contracts have been drafted and put out to consultation and are awaiting regulatory approval for launch. These new contracts will provide the market with additional flexibility in hedging and trading East of Suez price risk.

The DME is regulated by the Dubai Financial Services Authority (DFSA). All trades executed on the Exchange are cleared through and guaranteed by NYMEX (a member of CME Group), which is regulated by the U.S. Commodity Futures Trading Commission (CFTC) and is a Recognised Body by the DFSA.