Dubai DME's new oil futures shunned amid volatility

SINGAPORE - Dismally small trading volumes on the Dubai Mercantile Exchange (DME)'s new cash-settled oil futures signal that initial resistance may be turning into a resounding failure for the new contracts.

By (Reuters)

Published: Fri 20 Jun 2008, 2:22 PM

Last updated: Sun 5 Apr 2015, 1:11 PM

But the oil markets' heightened volatility and record-high prices are also to blame for the lack of interest, as they raise the financial cost of trading and increase regulatory scrutiny, leaving dealers wary of new contracts, traders said on Friday.

‘We have not done anything with these contracts. Since liquidity is so bad, we have not found any use to it,’ said a trader whose company trades the physical contract.

August DME Brent ZIOc1 traded an average of 113 lots since its launch on June 1, according to the latest available data, while DME cash-settled Oman ZIGc1 fared slightly better at 129 lots a day.

But both contracts are well below the 1,884 lots a day averaged by the DME Oman physical contract OQc1 during its first month of trading when it was launched a year ago.

The contracts have attracted less attention than the rival cash-settled Dubai contract, launched by InterContinentalExchange ICE.N last year, which averaged a much higher 2,870 lots a day on its first month of trading, before falling into near-oblivion.

There has been deep resistance to the two financial contracts as the industry sees little need for them.

‘Why would you have a new Oman contract? The DME is worried that trading in the Oman contract has peaked, but they should have thought of ways of making the contract better, rather than launch a new one,’ a Singapore-based trader said.

The DME can congratulate itself on having kept the DME Oman contract alive a year after its launch, a feat for a Middle East sour futures contract, after a series of failed attempts.

For a factbox of attempts to launch sour crude futures, click on [ID:nSP210208]

But volumes are falling and daily trades averaged only 994 lots so far in June, almost half of a year ago.

At the same time, around a third of all contracts traded in May led to physical delivery, threatening to transform the DME into a physical -- rather than futures -- clearing house, a distortion that the DME new cash-settled contracts aim to rectify by attracting financial institutions wary of physical delivery.


While the odds were against the new contracts from the start, the DME could hardly have launched them at a worse time.

‘There is so much going on now, with the absolute price going all over the place, that it is hard to take time to look at these contracts,’ said Tony Nunan, risk management executive at Tokyo-based Mitsubishi Corp.

Oil rose to an all-time record high of almost $140 a barrel this week and price swings on a given day can exceed $5, making traders wary of adding to their risks by trading new, untested contracts.

Higher oil prices also mean increased trading costs as the margin increases, reducing the volume that companies can trade.

‘Business is not a lot of fun at the moment. It is all slow. There should be more interest in the contracts but until the market settles, it will be thin,’ a Singapore-based broker said.

Threats of tightening trading regulations are adding to the cautious stance, even though they would be unlikely to impact contracts on the DME, which follows the New York Exchange (NYMEX) rules as it is backed by NYMEX NMX.N, which is regulated by the US Commodity Futures Trading Commission.

US regulators are feeling the heat from lawmakers to rein in what they see as excessive speculation in commodities markets, which they believe is the culprit behind record crude oil prices that have risen nearly 40 percent since January.

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