Oman backs DME on introduction of regional oil auctions

Oman has backed the Dubai Mercantile Exchange’s push to introduce oil auctions in the region, which is an effort in part to wrest oil pricing dominance away from London and to counter the growing buying power of China.

The government of Oman has been the DME’s strongest supporter since it began operations eight years ago and Oman oil futures is the exchange’s flagship contract.

"It's huge for us that the first mover on this is a state oil company of such standing," said Owain Johnson, the DME's managing director. He said the exchange would now be able to go to its 90 or so institutional customers and set up the systems to handle the first auctions, which it hopes will then lay the basis for auctions by others who want to market crude oil through the system.

Trading volume on the exchange has grown steadily since the Oman oil futures were introduced, but it still lags far behind that of the North Sea Brent contract in London and the West Texas Intermediate contract in New York.

There has been little headway, either, in convincing the very conservative regional national oil companies (Nocs) to embrace new methods of marketing their oil.

Top management at the big state oil producers, including the Saudi oil minister Ali Al Naimi, have often railed against “speculators” on the futures exchanges, who they argue cause prices to fall too far when there is a supply overhang.

But they remain reluctant to move away from their long-standing system of selling most crude via highly controlled long-term supply contracts.

A new threat to Nocs’ efforts to maintain market control has recently come from the Chinese, the region’s dominant oil buyer. In the past year, for example, there have been several occasions when two major Chinese state oil companies have been on either side (buyer and seller) of most of the over-the-counter “paper” contracts, which are used to set the daily prices of regional oil benchmarks.

Those prices are the benchmarks upon which the Nocs’ long-term contracts – as well as exchange-traded futures – are set.

Also, the Shanghai International Energy Exchange has said it will launch its own crude oil futures contract before the end of the year, giving China even more influence over regional oil pricing.

The DME is trying to persuade Nocs that adding an auction option, with its wide pool of customers, will ensure a fairer (and transparent) price for regional commodities and make them less susceptible to speculation in other markets or manipulation closer to home.

The experience that Oman has in the coming months with the DME auctions may, or may not, help to sway them.

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