Dubai Mercantile Exchange's lead oil benchmark, DME Oman, is finding favour with financial firms, including hedge funds and family offices seeking to bet on Asia's surging oil demand.
Dubai Mercantile Exchange's flagship oil futures contract gains interest
Trading houses across the globe are tapping the DME Oman benchmark to offer to hedge funds and other sophisticated investors, accelerating a push to put Dubai on the map as a trading hub for world oil markets.
There has been demand on Dubai's oil exchange for new trading instruments during the past few months, as three firms announced the first financial products making use of the DME Oman contract.
DME Oman is an oil-futures contract offered by the Dubai Mercantile Exchange, which was established in an effort to provide a benchmark for Middle Eastern crude to compete with Europe's Brent and West Texas Intermediate, its United States counterpart.
Financial firms account for about 6 per cent of the exchange's trading, said Christopher Fix, the chief executive of the Dubai Mercantile Exchange.
"We obviously want to grow that, and we're taking a marketing focus on addressing that particular segment of the market," he said. "This opens up a new arena for us to get new liquidity."
Financial firms seeking to gain exposure to growth in Asia and the Middle East were looking for ways to gain direct exposure to the region's oil markets.
Although Dubai has recently attempted to position itself as a hub for Islamic finance, its role as an oil trading centre is growing just as rapidly.
The Dubai Mercantile Exchange reported average daily volumes of 5,864 contracts last month, an increase of 9 per cent from the same month a year earlier.
ADS Securities, the Abu Dhabi-based brokerage, last month launched contracts for difference (CFDs) on the Dubai contract.
A type of swap, CFDs allow investors to take advantage of moves in prices without needing to own the underlying security or commodity.
"This is a CFD range specifically created in the Middle East market for the Middle East market," said Philippe Ghanem, the managing director of ADS Securities. "With the volatility and uncertainty still affecting global markets, using a local benchmark enables us to provide far more efficient pricing for our clients in the region."
The US Asian Commodities Basket Fund, an exchange-traded fund, and a petroleum investment fund offered by Diapason Commodities Management, a Swiss alternative investor, have also sought to offer the DME Oman contract to investors.
DME Oman faces challenges in supplanting western alternatives, but ADS is expecting to encounter demand from local investors seeking to own crude contracts as an investment, said Paul Webb, a trader at ADS Securities.
"A lot of the flow and volumes are still in US and UK crude, undoubtedly the most well-known contracts," he said. "But this region is slightly different, and that's an angle for ADS to try to exploit."
Mr Webb said the target market was "professional-style investors", among them local family offices that have become more sophisticated investors as they develop their expertise and investment capabilities.