COMMODITIES EXCHANGES: Investing in the futures
In just under two months, all eyes will turn to the Dubai Mercantile Exchange (DME) as it launches the region's first energy futures contract, potentially altering the way nearly one-quarter of the world's crude oil is priced [see box].
On the sidelines, two other rival exchanges - the Dubai Multi Commodities Centre (DMCC) and Qatar's Energy City development - will watch proceedings like hawks as they attempt to gauge investors' appetite for their own commodity offerings.
The DMCC has revealed plans to trade gasoline contracts by the end of 2007 with a steel futures contract and liquefied natural gas (LNG) storage hub also in the works. Gulf Energy, the company behind the Energy City development, is also looking to launch an energy futures and derivatives exchange in the emirate.
In a city on the look-out for the next big thing, the launch of the Dubai-based oil bourse at a time of strong oil prices is no coincidence. The challenge lies in convincing global traders and investors that the new exchange has the momentum to prosper where others have flopped.
'A lot of similar projects had trouble getting off the ground,' says Peter Heintzelman, head of Middle East energy and crude products trading at Standard Bank. The bank intends to trade on the DME's new exchange from its 1 May start date but is cautious to predict 'trading fireworks'. '[As a bank] you are not going to jump in with barrels and barrels of dollars but we, like everyone else, will be keeping a very close eye on it, especially in the first few days,' he adds.
Asian traders also appear reticent. One Japanese trading house told MEED that it would 'not be rushing' to join the new venture, preferring to analyse market reaction before committing itself, while an Asian refiner said it was still 'mulling over' the membership offer.
The DME, set up last June, is a 50:50 joint venture (JV) of the New York Mercantile Exchange (Nymex) and the government-backed Dubai Holding. Crucially, it looks to have stolen a march on its rivals by securing strong backing from Oman's Ministry of Oil & Gas.
The two world benchmarks, West Texas Intermediate (WTI) and Brent, both reflect the value of light sweet crudes, rather than the sour crudes which make up the bulk of Middle East output. It has long been argued the sweet-sour pricing differential is unduly volatile, making sweet crude benchmarks an inadequate tool with which to manage sour crude price risk.
Under the DME's plan, Oman will join the exchange as a strategic partner and 30 per cent stakeholder, adopting forward pricing of its crude oil based on the daily settlement price of the DME's Oman crude oil futures contract. The state-owned producer, Petroleum Development Oman, will supply customers wanting physical delivery, adding a layer of much-needed security to the contract.
But while the theory seems to stack up, developing the project to its current stage has not been without snags. Several proposed launch dates have been shelved over the past year as the DME worked to convince the major energy players to buy into the project while also negotiating common ground with the Dubai Financial Services Authority over regulatory issues.
DME chief executive Gary King admits to a certain relief at confirmation of an official start date. 'Our intention has always been to get it right the first time at the right time,' he says. 'It's an enormously complex process and we have been dealing with some big operational issues. We are developing a global exchange in nature.'
For all the talk about the importance of strategic partnerships and customer relationships, King realises the success or otherwise of the venture will hinge on the trading volumes of the market. 'Liquidity is key,'
he says.
The experience of other commodity exchanges in the region suggests a smooth ride is far from guaranteed. The DMCC rece
In just under two months, all eyes will turn to the Dubai Mercantile Exchange (DME) as it launches the region's first energy futures contract, potentially altering the way nearly one-quarter of the world's crude oil is priced [see box].
On the sidelines, two other rival exchanges - the Dubai Multi Commodities Centre (DMCC) and Qatar's Energy City development - will watch proceedings like hawks as they attempt to gauge investors' appetite for their own commodity offerings. The DMCC has revealed plans to trade gasoline contracts by the end of 2007 with a steel futures contract and liquefied natural gas (LNG) storage hub also in the works. Gulf Energy, the company behind the Energy City development, is also looking to launch an energy futures and derivatives exchange in the emirate. In a city on the look-out for the next big thing, the launch of the Dubai-based oil bourse at a time of strong oil prices is no coincidence. The challenge lies in convincing global traders and investors that the new exchange has the momentum to prosper where others have flopped. 'A lot of similar projects had trouble getting off the ground,' says Peter Heintzelman, head of Middle East energy and crude products trading at Standard Bank. The bank intends to trade on the DME's new exchange from its 1 May start date but is cautious to predict 'trading fireworks'. '[As a bank] you are not going to jump in with barrels and barrels of dollars but we, like everyone else, will be keeping a very close eye on it, especially in the first few days,' he adds. Asian traders also appear reticent. One Japanese trading house told MEED that it would 'not be rushing' to join the new venture, preferring to analyse market reaction before committing itself, while an Asian refiner said it was still 'mulling over' the membership offer. The DME, set up last June, is a 50:50 joint venture (JV) of the New York Mercantile Exchange (Nymex) and the government-backed Dubai Holding. Crucially, it looks to have stolen a march on its rivals by securing strong backing from Oman's Ministry of Oil & Gas. The two world benchmarks, West Texas Intermediate (WTI) and Brent, both reflect the value of light sweet crudes, rather than the sour crudes which make up the bulk of Middle East output. It has long been argued the sweet-sour pricing differential is unduly volatile, making sweet crude benchmarks an inadequate tool with which to manage sour crude price risk. Under the DME's plan, Oman will join the exchange as a strategic partner and 30 per cent stakeholder, adopting forward pricing of its crude oil based on the daily settlement price of the DME's Oman crude oil futures contract. The state-owned producer, Petroleum Development Oman, will supply customers wanting physical delivery, adding a layer of much-needed security to the contract. But while the theory seems to stack up, developing the project to its current stage has not been without snags. Several proposed launch dates have been shelved over the past year as the DME worked to convince the major energy players to buy into the project while also negotiating common ground with the Dubai Financial Services Authority over regulatory issues. DME chief executive Gary King admits to a certain relief at confirmation of an official start date. 'Our intention has always been to get it right the first time at the right time,' he says. 'It's an enormously complex process and we have been dealing with some big operational issues. We are developing a global exchange in nature.' For all the talk about the importance of strategic partnerships and customer relationships, King realises the success or otherwise of the venture will hinge on the trading volumes of the market. 'Liquidity is key,' he says. The experience of other commodity exchanges in the region suggests a smooth ride is far from guaranteed. The DMCC receThis content is only available to full MEED package subscribers (MEED magazine and MEED.com).
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