SINGAPORE: Oil industry enthusiasm over Oman’s landmark pledge to use a new futures contract is being tempered by concerns over the fine print, which may yet rob the market of its best hope for a more vibrant marker.
In a move expected to lend support to the latest in a line of global sour crude futures contracts, all of which have failed, Oman has said it would abandon its retroactive pricing policy and use forward pricing on the Dubai Mercantile Exchange’s (DME) Oman contract when it launches next year.
But Oman’s Oil Minister Mohammad bin Hamad bin Seif al-Rumhy injected a note of warning, saying in a statement that the sultanate would support the DME, “so long as it performs well and guarantees fair prices that match those of the global markets”.
For oil traders, that comment rang alarm bells over just how closely Oman would match its official selling prices (OSPs) – used to price most of its 700,000 bpd of exports – to the DME contract, due to launch next year.
In particular, it is unclear how Oman will reconcile forward DME prices – which will have the option to settle against physical Oman – and the pricing of physical barrels.
“This is going to be a huge change to transparency. It will be easy to hedge,” said Tony Nunan, manager at Japan-based Mitsubishi Corp’s risk management unit. “I am not exactly sure how they will price physicals.”
A successful launch will also be a boost for the New York Mercantile Exchange (Nymex), the joint-venture partner with Dubai, as its contract for Russian sour Urals crude launched earlier this year has failed to attract much interest.
Oman’s decision to abandon its practice of retroactive pricing, which some traders complained lacked transparency, has transformed the industry’s view of the DME launch from one of scepticism to one of hope, dealers said.
“Having Oman crude actively traded will help define prices better across the barrel,” a Singapore-based trader said.
Debate over the best benchmark to efficiently price the 12mn bpd of Middle East crude sold into Asia has been brewing since the 1990s, when falling output in Dubai threatened its status as the sole marker crude.
Ultimately, Oman was introduced to give the market more liquidity. But dealers said its success has been limited by the narrow participation in the over-the-counter market, where a handful of players still exert significant power.
While Oman’s backing of the DME has raised hopes that it offers the best alternative pricing mechanism, ultimately, the market’s transparency and liquidity will depend on how much control over its oil Oman actually relinquishes.
“Oman keeps on saying they don’t want their interest compromised,” said the Singapore-based trader. “Their trump card all this while has been the OSP system.”
Some traders are guessing that Oman could set a differential for its crude a month before the crude loads, using a formula similar to what Saudi Aramco uses. And some traders are saying that Oman may want to keep a sort of retroactive pricing methodology, setting its physical differential based on past trades.
This would allow end users to keep a bigger say in the way physical crude is priced, likely pushing prices slightly down, and explaining why the Ministry of Oil and Gas (MOG) may want to get away from this system.
The exchange will likely have to establish itself as a viable alternative for months if not years before wary Middle East producers are willing to price off it. – Reuters