x Abu Dhabi, UAESunday 21 January 2018

DME a safer bet for all concerned

I realised I had to get out of the oil business the day in 1991 a broker threatened to have me killed.

I realised I had to get out of the oil business the day in 1991 a broker threatened to have me killed. The smooth delivery of the message, over a drink in a bar in Wimbledon, did nothing to obscure its crudeness. Either you stop increasing the price of jet fuel in your daily price assessments, the broker told me, or you should be careful how you cross the road. I had reasons to believe it was not an entirely idle threat. Only weeks before, I had received a call from Scotland Yard following a trail of numbers from the mobile phone of a Russian oil trader who had spoken to me hours before he was murdered near Paddington Station.

It was my first job in journalism and frankly, for US$2,000 (Dh7,346) a month, I was beginning to wonder if it was worth it. The purpose of the tale is to illustrate how peripheral, discretionary factors can interfere in the process when the price of a strategic commodity is decided by one individual. In the old days, prices would have been set by direct negotiations between producers and users of oil. At the end of the 19th century, such talks involved one department of John D Rockefeller's Standard Oil and another. They manipulated prices to ensure that any competitors who dared to offer an alternative were driven out of business.

When the oil trade shifted to the Middle East, the talks engaged Gulf sheikhs and their western partners who also ran global refineries. Gradually the balance of power shifted to the Gulf capitals as endowed nations exerted their sovereign powers over their resources. Then in the 1980s, futures markets took over, at least for sales of Middle Eastern crude to Europe and America. In Asia, because there was no liquid futures market, the two sides agreed to use prices in trade publications like the one that once paid my wages.

My job back was billed as a reporting role, but it centred on publishing daily price assessments that were used by the oil industry as a benchmark for their long-term supply contracts. Globally, the contracts for a myriad of different crude oil grades and fuel qualities were worth billions of dollars, so every small change in my assessments could make or break oil buyers, traders and exporters alike.

The broker's problem was that the prices I set for cargoes of jet fuel exported from North African producers in the Mediterranean were losing his client a lot of money. I had recently made changes to the way I assessed the market for jet fuel, stripping out a fat margin that traders had incorporated into their assumptions. There was no doubt I was doing the right thing, and the oil exporting nations were an unwitting beneficiary of the move. But it was hard to swallow for the middlemen who had locked in millions of dollars in premiums on the basis that my discounts would continue to give them a lift.

Removing such extraneous factors from the pricing of Gulf oil exports is what Thomas Leaver, the chief executive of the Dubai Mercantile Exchange (DME), hopes to do with his Oman crude oil futures contract. Having previously worked as a trader for Finland's largest oil company, Neste, he is well aware of the dangers of allowing a 24-year-old reporter to set world oil prices. Now he is hoping to persuade state oil companies in the Gulf to switch to his Oman crude oil futures contract as the basis for their exports to Asia.

The advantages of the DME futures contract as a benchmark are obvious. It is anonymous, available worldwide through an electronic trading system and open 23 hours a day. Liquidity on the DME still trails the more established exchanges in London or New York, but it already attracts hundreds of times more trade than the physical market where trade publications make their assessments. Moreover, Mr Leaver says an historical analysis shows that the price of oil on the DME is higher, on average, than the price quoted by the trade press. This means Gulf exporters are losing out.

I cannot say I am surprised by the findings. If oil exporters do not want to negotiate prices directly with their customers as they used to in times gone by, then a futures market undoubtedly represents a better deal than the alternative. And reporters like me can relax in the cafes of the DIFC without fearing for our lives. @Email:tashby@thenational.ae