Singapore (Platts)--7Dec2012/612 am EST/1112 GMT

A number of Middle Eastern banks are looking at financing oil futures trading via the Dubai Mercantile Exchange to capitalize on the oil being produced and traded in the region, filling the liquidity gap left by Western banks hit by the 2008 financial crisis, the DME's CEO said Thursday.

The exchange is also focused on winning over more major Asian end-users and trading companies in China, India, Japan and South Korea to its platform to position itself as a regional benchmark, Christopher Fix told Platts in an email interview.

The financing of oil futures contracts globally has traditionally been done by Western banks. "But they have suffered during the financial crisis and the amount of liquidity they have available for such activities is lessening," said Fix, a former BNP Paribas Asia-Pacific head of marketing for commodity futures, who succeeded Tom Leaver at the DME in June.

He said companies are seeking alternative sources of financing as the traditional ones dry up, offering a huge opportunity for the financially strong Arab banks to get involved in the funding of the oil produced and traded in the region.

"What is new about what we are suggesting is that we are hoping to engage Arab banks in the same activity. Essentially there is $1-1.5 billion worth of oil being financed every month through the DME," said Fix. When a broker or trader purchases the futures contract, he borrows money from the bank to finance that deal until he is paid by the end-user. This also includes financing for margin calls on open positions, brokerage and other administrative charges.

"We are seeing a lot of interest from Arab banks to become involved. A number of regional banks are looking at this very seriously," he said but declined to give details.

"Banks here have a lot of liquidity and can very easily become involved in this activity, which will help to ensure the profits from Arab oil will remain in Arab institutions."

A UAE newspaper, The National, reported in October that the DME was in advanced discussions with six banks from Saudi Arabia, Bahrain and the United Arab Emirates, and was aiming for financing initiatives to start early next year.

Asian banks such as Bank of China and Asia-focused Standard Chartered have also started oil trade financing in recent years.

This comes as the world's top investment banks and mid-sized Western banks grapple with the aftermath of the financial crisis and tighter regulations following a 10-year commodities boom, limiting risk appetite in oil and seeing a number of them exit from Asia. GETTING REGIONAL PLAYERS ON BOARD

The DME last month opened an office in oil trading hub Singapore and in September, included India's top private enterprise Reliance Industries Limited as its newest member in Asia -- part of the DME's strategy to focus on growing Asian giants China and India, said Fix.

Analysts have said that major Middle Eastern oil producers such as Saudi Arabia would only be persuaded to use the DME Oman contract as a basis for pricing their crude if more Asian end-users and refiners endorse the change.

The contracts on the DME trade for most of the day, with the exchange using the trades done in the last 5 minutes of the 0830 GMT settlement window to determine the settlement price.

Fix said there are currently 2 million-3 million barrels of oil traded daily during the five-minute settlement window on DME. Since its launch in 2007, a total of 3.7 million DME Oman crude oil futures contracts, or 3.75 billion barrels of oil, have traded.

In November, average daily volumes in the five-minute settlement window reached 1,696 contracts, a 4% increase on the previous record high of 1,636 contracts in October. The DME said such volumes mean that more than twice the national daily output of Oman is now being traded in a five-minute period on the exchange.

The DME also recorded its highest-ever settlement window volume last month, with 2,545 contracts traded on November 15, eclipsing the previous record of 2,515 contracts set on April 24 this year.

"There is no other place in the world where that amount of sour crude oil is traded in such a short period of time, establishing a credible price determined by actual buyers and sellers," Fix said, adding that the adoption of the DME Oman contract as the pricing benchmark for Middle East crude is inevitable.

Asia has always wanted a regional crude benchmark, especially since the demise of Tapis as a marker for light sweet crudes.

DME Oman is currently the world's largest physically delivered crude contract, though the current marker for Middle East crude is the Dubai price assessment, which includes the Dubai, Oman and Upper Zakum crude grades, published daily by Platts, which is part of The McGraw-Hill Companies. Saudi Arabia uses the average of Platts Dubai/Oman crude assessments to set the Official Selling Prices for its crude oil heading to Asia.

"Any adoption of the DME Oman pricing is a decision for the NOCs [national oil companies] and is not something we are trying to influence.

When they feel it is right for them, we will be very happy to discuss what benefits DME can bring to their crude oil pricing," Fix said, but declined to add which national oil companies the DME is talking to.

"What I believe is that the NOCs are very important to DME, but so are the customers and that is the piece of the puzzle that I feel has been neglected."

Fix said although output from producers in the region, such as Dubai, may be declining, Oman's output has been increasing, ensuring the future of its contract.

Omani oil minister Mohammed al-Rumhy in November 2011 had said the non-OPEC producer -- which managed in recent years to stem a decline in oil output after peaking at just under 1 million b/d in 2000 -- was targeting production of 1 million b/d by end 2012.

But Rumhy said in October that geological and other issues in Oman would make that end-year target unrealistic. He did not give a precise time frame for the output rise in the sultanate, which is currently producing 915,000 b/d of crude.

Fix said the DME is looking at new contracts, but this does not include other crude grades. "Depending on market demand, we will look to list new contracts in the future, but they are more likely to focus on other parts of the barrel." The DME currently lists only the Oman crude contract.

--Ramthan Hussain, ramthan_hussain@platts.com --Edited by Deepa Vijiyasingam, deepa_vijiyasingam@platts.com; Geetha Narayanasamy, geetha_narayanasamy@platts.com