DME Sees GCC Pricing Shift

Middle East oil producers are showing increasing confidence in the fledgling Dubai Mercantile Exchange (DME), coming around to the idea that the liquidity they hope to see may only develop after they shift their benchmark pricing, the exchange's chief executive said.

Unlike four years ago, when most producer nations would only consider adopting a new benchmark for Asian crude oil prices once a contract had achieved a significant level of liquidity, they are now ready to consider making a switch that would take the DME's Oman futures contract to a new level.

"Now that they've seen the exchange growing they realise it will continue to grow organically and it'll grow a lot faster if they all buy into it," said DME Chief Executive Thomas Leaver in an interview with Reuters at the Ceraweek conference in Houston.

"They know we need them and they need us," Leaver said. The changing mind-set of major producers like Saudi Arabia was highlighted last year, when state oil firm Aramco dropped WTI crude in favor of a basket of sour Gulf of Mexico grades as the basis for its exports to the United States.

The Saudis and other regional producers moved to a benchmark based on ICE Brent crude oil futures a decade ago, but have held to the Platts physical Oman/Dubai assessment as the basis for exports to Asia, which buys half its crude, despite years of industry angst over diminishing physical Dubai supply.

While the DME's Oman contract, launched in 2007, has raised expectations for a change, it has struggled to achieve critical mass, despite the backing of both the Oman and Dubai governments, which use it to price their own oil.

The DME's volume grew by 69% in 2009 from 2008 and was trading an average of 3000 contracts a day by the third quarter, although most participants continue to take delivery at the end of the month, limiting sustained interest.- Upstream