|
Singapore: One year after launching the world's most eagerly anticipated oil futures contract in a decade, the Dubai Mercantile Exchange is back with a follow-up it hopes will kick trade into a higher gear.
Unfortunately, say traders, the two new contracts - which are meant to appeal to financial traders by sidestepping the risk of making or taking physical delivery of Brent or Oman crude - may face exactly the same problem as their predecessors.
"It's a chicken and egg problem. Unless an exchange already has liquidity, nobody wants to participate," said Robert Nunan, risk management executive at Tokyo-based Mitsubishi Corp.
The DME launched its Oman contract to much fanfare last year, touting it as the first Middle East futures sour crude oil contracts to have the backing of local governments -both Oman and Dubai are shareholders - and offer physical delivery.
It has already succeeded to some degree, outlasting previous failed efforts to launch sour crude contracts and posting generally rising trading volumes last year.
Physical delivery
But volumes have come off the highs reached early this year, indicating some participants may be giving up hope that it will become a benchmark for the vast and growing exports of Middle Eastern crude to Asia.
And at the same time physical delivery continues to rise, showing how most traders on the exchange are using it as a means to buy and sell physical Oman crude, rather than to speculate on future prices or hedge their exposure, which would add more liquidity.
In April, daily trading volumes on the DME Oman contracts averaged 1,225 lots, almost half the 2,000 on average in early 2008.
The danger of being stuck with - or forced to deliver - a cargo of Oman crude in a less than liquid market has kept an entire group of financial players away, traders say.
And while the new cash-settled Brent and Oman crude contracts due to launch on June 2 will ensure no one gets caught having to deliver or take physical crude, the fact that it is cash-settled against the existing contract means it is still subject to the other problems that plague the physical contract.
"The financial contracts will be different in that they are not physical but people who will trade them will still be exposed to high volatility," said a trader with an investment bank, who trades the current contract and plans to trade the financial contract too.
There is at least one recent precedent for success of a financial contract based on physically settled futures - the IntercontentalExchange's sweet US crude contract, which is cash-settled on the basis of Nymex's contract. Open interest in ICE's version, launched in February 2006, has surged to about one-third that of Nymex's.
"A lot of people have been afraid of the DME Oman contract because of the physical delivery. So making a financially settled contract is a good idea. But will it be successful? I'm not sure," Nunan said.
Many feel East Asia is in dire need of a strong regional benchmark. Fast-growing consumers in Asia like China and India are set to take a much larger share of future world oil demand, while most of that increased supply is set to come from the Middle East, making this fertile ground for a benchmark.
While traders and bankers alike voice their scepticisim, most of those talked to said they already used the DME and would also trade the new contract.
Benchmark
And in comparison to the launch of Nymex's sweet crude contract in 1983, which has since become the world's most liquid oil contract, volumes on the DME are already respectable.
The DME front-month averaged 670 lots a day so far, just short of the roughly 800 lots a day in the first year of operation of the Nymex contract, according to Reuters data.
However traders say it is still a far cry from the kind of liquidity that would convince Middle East oil producers like Saudi Arabia and Kuwait to begin using it as a benchmark for their exports, in the same way they use Nymex and ICE futures contracts for shipments to refiners in the US and Europe.
For now, most Middle East producers price their crude against Dubai, or the average of Oman and Dubai quotes as assessed by reporting agency Platts, a division of the McGraw Hills Companies.
"Whether to participate in the DME is the million dollar question," said a Middle East producer. "We would, if liquidity were higher. The new contracts should bring higher volumes, so we'll wait and see."
Fact file: Failed contracts
Simex: The Singapore International Monetary Exchange (Simex) launched the world's first sour crude oil futures in June 1990. After suffering from lack of trades for many months, the Dubai futures contract was terminated in February 1992. Simex officials said the launch had been badly timed, not giving it sufficient time to build up liquidity before being overtaken by events in the Gulf crisis.
IPE: The International Petroleum Exchange's (IPE) July 1990 launch of a sour crude contract based on Dubai crude just prior to the Gulf crisis proved ill-fated, as forward interest in Dubai dried up with the embargo on Iraqi and Kuwaiti crude. The contract, which was last traded in May 1991, was terminated in November 1992. ICE Futures, host of the European benchmark London Brent crude contract, launched a Dubai futures contract in May 2007, just two weeks before the DME's Oman crude contract.
Nymex: The New York Mercantile Exchange's (Nymex) sour crude futures allowing for physical delivery of several streams of domestic and international crude were launched in February 1992 but failed to attract trader interest. The exchange blamed the contract's illiquidity on the nature of the underlying cash market.
Tocom: Tokyo Commodities Exchange has a long-existing Middle East crude oil futures contract priced in yen in a locals-only market. The contract is based on the average Oman/Dubai crude price published by pricing agency Platts. Liquidity and open interest are falling.
Nymex: Middle East sour crude oil futures contract based on the Oman/Dubai crude price was terminated in April 2001, only traded for the first two days after it was introduced in May 2000.
Singapore Exchange: The Singapore Exchange launched a sour crude futures contract in November 2002 settled against the Oman/Dubai crude price. Later agreed to work with Tocom in a failed attempt to increase liquidity.
|
