Dubai will begin setting the official price of its benchmark crude in relation to Oman oil futures, abandoning decades of opaque pricing to give a fresh push to the two-year-old Dubai Mercantile Exchange contract. The change, which will take effect with July trade for September crude, will give Middle East and Asian oil companies another reason to trade in Oman futures.
Activity in which has stalled far short of the volume needed to establish it as a rival benchmark to Platts over-the-counter price assessments. "This is a big decision. Dubai sellers will have to watch the DME before they sell their crude, so everyone else will have to watch it," said a Singapore-based trader.
Dubai will set the official price of its crude two months ahead of loading, based on a differential to prices on the DME, a move that effectively recognises Oman as the benchmark for Dubai crude - a reversal of the situation in the 1990s when Dubai crude effectively set the benchmark for all Middle East grades.
Ending a process in which Dubai used an opaque industry formula to set the outright price for its crude, from July onward Dubai authorities will set the differential to DME Oman - expected to be a discount as Dubai is a lower-quality crude - that will determine their Official Selling Price (OSP), a move traders welcomed as offering more transparency for the benchmark.
The use of futures contracts as a basis for the Dubai crude OSP, after Oman made a similar decision two years ago, could encourage other Middle East producers to make the switch from Platts published Oman and Dubai price assessments, too. Most have been pricing their exports to Europe and the United States against Brent and NYMEX futures contracts for the past decade.
"In those countries that use Platts Dubai and Platts Oman in their formula, they could theoretically just use the Oman (if they switch to DME contracts)," said Tom Leaver, chief executive of the DME. "We are in touch with all of the Middle East producers. (This) certainly helps the decision process."
Raising the profile of the DME - majority owned by the CME Group Inc, Tatweer, which is a member of Dubai Holding and the Oman Investment Fund - is key to growing traded volumes on the DME which hover at around 2,000 lots a day, traders say. Dubai crude, together with Oman, is used as benchmark for more than 10 million barrels per day (bpd) of crude heading to Asia and the change in pricing is a major shift for the Middle East oil producer that could prompt more producers to join the exchange, which is key to its success.
The move effectively means that Oman crude prices will increasingly determine those of Dubai, whose output has been declining, reversing the two grades' historical relation. "I would think people would just use Oman because Dubai is priced in relation to Oman. From a trading or hegding perspective, you can use just one contract to hedge both types of crude. Your basis risk is only the differential," Leaver said.
Dubai will issue its crude differential to Oman three months ahead of loading. The first differential will be issued on Thursday for the September OSP, a media official with the DME said in an email to Reuters. The differential, for September-loading Dubai crude, will then be applied to the average of daily settlements for September DME Oman during the month of July, and the September OSP calculated on the last day of July, once the last September Oman settlement is set.
The Dubai Department of Petroleum Affairs (DPA) and Oman's Ministry of Oil and Gas (MOG) will simultaneously publish the Dubai and Oman OSPs for September and subsequent months. The change reflects the reality of the dwindling Dubai output, which is believed to have fallen below 80,000 barrels bpd, making it a very fragile benchmark to price more than 10 million bpd of crude off. By contrast, Oman's output is on the rise, having gained 5.8 percent in the first four months of this year to 786,100 bpd, according to government data. The Gulf Arab state is targeting output of 800,000 bpd in 2009.
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