The Dubai Mercantile Exchange (DME) is preparing a final push to bring the world's oil trade back to the Gulf, 20 years after the region surrendered the power of setting prices to markets in London and New York. The two-year-old exchange, a joint venture between the Dubai developer Tatweer, CME Group, which owns New York's top commodities exchange, and the Oman Investment Fund, has built up a daily trade of more than two million barrels a day in its benchmark Oman crude oil contract.
It has incorporated the latest electronic trading technology and brought in new floor members including oil companies, trading firms and Wall Street banks. But now the Dubai market faces its biggest challenge: to persuade the state oil companies of the region - starting with the largest, Saudi Arabia - to use the DME Oman futures as the basis for their export pricing. "The Saudis are the linchpin and they know that," said Thomas Leaver, chief executive of the DME, in an interview. "We are talking to Abu Dhabi, Qatar, Kuwait, Iran and Iraq. They have all told us if the Saudis move, they will move with them."
If these exporters adopt the Oman futures contract as their benchmark, the DME could aspire to compete with the two largest oil markets in the world today, he said. Brent crude oil futures, traded in London on the InterContinental-Exchange, and West Texas Intermediate on the New York Mercantile Exchange, each see about 500 million barrels of trade daily. But the track record for new futures contracts around the world is not good. Almost 90 per cent of new contracts wither and die without achieving a critical mass of liquidity.
After two years of operation, Mr Leaver regards the DME as a technical success, but not yet a commercial one. Much higher volumes are required to fulfil the dream of its founders. The worst financial crisis in a generation has not helped build volumes at the DME, which is located in the Dubai International Financial Centre. But Mr Leaver said the crisis could actually present the exchange with an opportunity to bring over its most important partner.
Saudi Aramco, the kingdom's state oil company, already uses futures markets as the price benchmark for oil sales to the Americas and Europe. But in Asia, the Gulf's largest market, no such futures market has existed, until now. Aramco and other state oil companies have relied on informal price estimates for Oman and Dubai crude oil which Mr Leaver says are increasingly lacking in transparency and liquidity, because the financial crisis has eliminated some major traders from these markets.
Relying on thinly traded, opaque markets as the reference for the world's largest crude oil exporting region exposes Gulf nations to the risk of price manipulation by consumers, who stand to gain from lower prices. Mr Leaver is using these arguments with Aramco and other major producers to persuade them to switch to the DME Oman crude oil contract, saying that reliance on open and transparent futures markets represents a more secure underpinning for the region's long-term supply contracts.
"Futures offer fair value and take the manipulation out of pricing," Mr Leaver said, adding that historical analysis of the difference between the DME Oman contract and the estimates used today had shown that exporters were losing out. One day, Mr Leaver believes, the DME Oman contract could even surpass the volumes recorded in London and New York. He pointed to research showing that futures markets can expect to see about 15 times the volume of physical trade of oil in their sphere of influence. The Gulf sees about 15 million barrels of crude oil exported every day, most of it going to Asian markets, where there is daily refining capacity for another 25 million barrels.