All eyes on Dubai’s new benchmark
http://www.livemint.com/2007/06/01002450/All-eyes-on-Dubais-new-benchm.html
At 2am Dubai time (3.30am IST), a long-awaited effort
gets under way in Dubai’s opulent financial centre to
give the world a new crude oil pricing benchmark:
the recently organized Dubai Mercantile Exchange (DME)
is launching its West Asia “sour” crude futures contract
as an alternative to the bellwether New York and London
contracts for the black gold of Texas and the North Sea.
The launch comes as powerful market players are increasingly
questioning the relevance of the main crude oil benchmark
traded on Nymex Holdings Inc.’s New York Mercantile Exchange,
the world’s largest energy marketplace.
Refinery and trading dynamics peculiar to the US market
have pulled the Nymex benchmark several dollars a barrel
below other key crudes.
No one is claiming that Nymex’s busy energy market
will cease to matter. Nymex chief executive officer
James Newsome predicts the West Asia contract launch will
expand trading volumes, rather than rob Nymex of market share.
Indeed, DME is a joint venture of Tatweer,
a unit of the Dubai government’s investment vehicle Dubai Holding,
and the New York Mercantile Exchange.
DME’s new contract will give the sea of buyers and sellers
of West Asian crude—particularly the voracious Asian oil
consumers—a more transparent, publicly traded pricing mechanism
to gauge sour-crude prices and manage the risks of volatile energy markets.
The DME contract is based on physically delivered Omani crude.
In a coup for DME, the Oman government last year agreed to
use DME settlement price for Oman’s own crude sales.
Then, just on Wednesday, DME announced that another producer,
the government of Dubai, also will use its futures contract
to price its oil. “This is probably the biggest thing that’s
happened in trading in the oil markets in 25 years,” says Gary King,
chief executive of DME.
Because Dubai is four hours behind Singapore and three
hours ahead of London, its business day bridges the gap
between two major markets.
Buying and selling will be done electronically, 23 hours and
15 minutes a day. But the DME—not to be outdone in the
Persian Gulf state’s skyscraper-encrusted business centre—
has built a tricked-out trading lair.
Global oil players including Nymex have long sought to
establish a publicly traded benchmark for Arab crudes.
But Saudi Arabia, the world’s biggest oil producer,
hasn’t allowed its oil to be traded on the open market
since 1985, says Edward Morse, chief energy economist
for Lehman Brothers Holdings Inc.
Some analysts speculate that the oil kingdom may reconsider
that with the launch of the DME contract.
“Massive political, cultural and economic barriers stood
in the way,” recalls John D’Agostino, a former Nymex
executive who made scouting trips to Dubai starting in 2002.
The year before, Nymex had tried to launch a West Asian
crude contract. It was financially settled but had no
mechanism for physical delivery.
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