Dubai to link crude price to DME futures contract

The Dubai Government will strengthen Dubai crude oil as a benchmark for the Middle East by directly linking its price to the Dubai Mercantile Exchange (DME) futures contract, officials said yesterday. Starting in September, Dubai crude oil will be sold for the first time at a fixed premium or discount to the average monthly settlement price of the Oman Crude Oil Futures Contract on the DME.

Experts say the move will boost confidence and interest in the DME's contract as a relevant force in the pricing of oil exports. However, the exchange still needs to gain the endorsement of a larger oil producer than Dubai to match the influence of older mechanisms that exporters use to determine a fair price for their crude. "The DME now closes the gap for full price discovery of the two historic and accepted benchmarks in the Middle East," said Tom Leaver, the chief executive of the DME. He said that publishing an official selling price for Dubai crude was "a strong signal to other GCC producers to join this initiative and back true and fair value for their oil exports."

The official price of Dubai's crude is currently based on the Oman contract, but the Government's Department of Petroleum Affairs can retroactively change the amount of the premium or discount to the Oman contract at the time it ships the oil. Dubai crude is of a different quality than Oman's, and the premium or discount, known as the differential, is determined by demand in the world oil market. The official selling price for Oman crude has been determined by the DME futures contract since Aug 2007 with no differential.

Under the scheme announced yesterday, Dubai's differential will have to be set three months ahead and made public, said Abdulla Abdul Karim, the director of the Department for Petroleum Affairs. "By announcing a forward price based on the DME Oman contract, we will signal to the markets the fair price of Dubai crude in relation to Oman, further strengthening the commitment to price transparency and fair value for Middle East crude oil," he said.

The DME will announce on Thursday the first differential, for oil delivered in September. Since the launch of the Oman futures contract in June 2007, the DME has sought to become a major force in the pricing of Gulf crude exports, most of which go to markets in East Asia. Official selling prices for most of those exports are set by oil ministries, on the basis of prices published by the trade press.

The DME's mechanism is known for its transparency, but concerns remain that the trading volumes of its contract, which typically number in the thousands of lots, are not large enough. Established exchanges in London and New York typically trade hundreds of thousands of contracts. [e-mail]