China’s plans to develop oil futures trading could have a negative impact on Middle East oil suppliers, according to the head of the Dubai Mercantile Exchange.
The Chinese authorities are looking to develop crude oil futures in Shanghai to exert more control over oil pricing and reflect the fact that China – and Asian markets in general – have become the fastest-growing oil consumers and the most important destination for Middle Eastern oil, said Christopher Fix, the DME chief executive.
Previous attempts to develop petroleum product futures in China have not worked but Mr Fix reckons the new effort will succeed. “The Chinese want to have their own price-setting exchange. They understand the importance that crude oil plays in their economy and they will take steps to ensure it works,” said Mr Fix, a fluent Mandarin Chinese speaker, who will be leaving his current post in June to become the Singapore-based head of Asia Pacific for the Chicago Mercantile Exchange, a major DME shareholder.
The DME’s flagship Oman crude oil futures contract has grown steadily since it was launched in 2007, with the aim of providing a regional benchmark for pricing crude oil grades from the world’s most important producers.
But the DME contract is still dwarfed by North Sea Brent futures trading in London, which still acts as the world’s crude benchmark, even though it is an outmoded system, Mr Fix said.
“Brent has been serving the market for a very long time but it doesn’t keep track of the shifts in the way the market has continued to move east. The Brent tail still wags the dog even though Brent production has been declining – the field itself is being decommissioned as we speak,” he said.
The DME and the Shanghai International Energy Exchange last October announced a deal to cooperate on a new Asian benchmark crude oil futures contract.
The Shanghai exchange, known as INE, was set up in 2013 with the aim of establishing an energy derivatives trading platform that would give China more control over pricing the oil it is buying in increasing volumes, mainly from Middle East producers.
The Chinese have moved slowly and sought support for their energy exchange from a variety of players, including members of the Abu Dhabi oil community.
The DME has been a backer of Chinese plans, but Mr Fix says that Middle East producers could be left behind if they do not take steps to boost significantly the liquidity of the regional benchmark crude contract.
This would leave them stuck in the middle of London’s Brent and a new Chinese futures contract in terms of world oil pricing power.
“The danger is at some point the Chinese are going to continue to develop [their oil futures contract] and evolve it and the Middle East will get stuck between North Sea Brent and the Chinese,” Mr Fix said.
“There needs to be an initiative by major regional producers to ensure their ambitions are realised.”
The UAE’s goal to ensure it is the regional energy trading hub has been built around initiatives like the DME, whose other major shareholders are Dubai Holding and the Oman Investment Fund, as well as the expansion of facilities at the oil hub in Fujairah.
Suhail Al Mazrouei, the Minister of Energy, has referred on several occasions to “Fujairah [becoming] a centre of gravity for energy, not only for the UAE but also for the region”.
But a number of top energy executives – including Chris Bake, chief dealmaker for Vitol, which is a big player in Fujairah – have pointed out that boosting trading in the region, and therefore exerting more control over oil price-setting, requires a less rigid approach to energy trading.
Most of the region’s producers, for example, still have a system whereby their oil is sold almost entirely to long-term consumers with little traded in the open market, where it might be delivered against a futures contract, thus boosting that contract’s trading volume.
amcauley@thenational.ae
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