PLATTS INTERVIEW: Mideast banks eyeing oil trade financing on DME - CEO
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
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
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
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 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
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
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, firstname.lastname@example.org
--Edited by Deepa Vijiyasingam, email@example.com; Geetha