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Dubai oil futures open new exchange battlefront

DUBAI/SINGAPORE - ICE’s new Dubai sour crude oil futures contract saw modest trade in its Monday debut -- the first salvo in ICE’s battle with the New York Mercantile Exchange for the dominant Middle East contract.

Atlanta-based IntercontinentalExchange, which hosts Europe’s benchmark Brent crude contract, stole an 11-day march on its top rival by announcing its own Middle East contract just as the Dubai Mercantile Exchange (DME), a joint-venture between Dubai, Oman and the NYMEX, delayed its offering to June 1.

The world’s top two energy exchanges are racing to build trading volume behind the two different contracts, with ICE counting on an entrenched price system and well-established platform while the DME hopes to quench a thirst for change.

Both are hoping to capitalise on rising supplies of high-sulphur crude, growing Asian oil consumption and demand for better risk-management tools in Asia, where past efforts to establish a vibrant futures market have failed.

As of 0833 GMT, the front-month August ICE Dubai contract stood at $66.34 a barrel with 190 lots traded, Reuters data show. The first four contract months had traded 514 lots, equivalent to just over half a million barrels.

With expectations set low given flat starts for other sour crude contracts, some traders said it was a good beginning.

“It’s doing better than we expected,” said one trader with an investment bank. “I’m optimistic, but let’s wait for London and New York to get in before we make an assessment.”

Another trader said the activity so far may have been the result of trading incentives offered by ICE, and the ultimate success of the contract could yet be weeks away.

The Middle East supplies over 30 percent of the world’s oil, most of it sour and much of it priced against Dubai, but traders in the region tend to be conservative, tempering expectations.

“Our customers are not so aggressive... we will not start trading right away,” said Kentaro Obata, managing director of Astmax, one of Japan’s biggest commodities investment funds.

“For us it’s important to see the liquidity grow after the launch date,” he said.

The Dubai contract is off to a better start than the most recent sour crude contract, NYMEX’s Russian export blend, which has seen almost no trade since its launch last October.

Assessment vs physical

ICE’s Dubai is based on the Platts pricing system, which is the benchmark for Middle East crude exports to Asia, accounting for nearly one-sixth of the world’s oil.

ICE also has the advantage of a well-established trading platform and close link to ICE’s Brent futures, often traded against Dubai.

The DME, a new exchange, is hoping that discontent with the status quo will encourage traders to use its Oman contract, which for the first time offers settlement against physical delivery of the crude, similar to NYMEX’s US contract.

Some traders feel the existing price system is no longer adequate given the drop in Dubai output to less than 100,000 barrels per day.

“I did expect some trades. But I think DME will see a bit more action as they claim they have signed up a huge number of market makers,” said a Singapore-based crude trader.

The DME has spent some two years building interest in the contract and liaising with members, and is the first ever to win the support of a Middle East producer. Oman will use the DME contract to price its crude exports.

But the prospect of a change from the existing system could be daunting for conservative Asian refiners and traders, and fund investors may be suspicious of the physically settled contract until they have seen how the delivery mechanism works.

The ultimate measure of a contract’s success is likely to be determined in Riyadh. A move by top exporter Saudi Arabia to use one of the exchanges instead of the current system of published Dubai and Oman prices could generate additional interest.

While it has shown limited interest so far, Saudi Arabia has changed its pricing markers when more liquid benchmarks emerge. It uses WTI and Brent futures for US and European prices.