SINGAPORE: Trading in Oman crude futures on the Dubai Mercantile Exchange has been gradually taking off since its debut in June, but the current risk aversion prevalent among Asian refiners may continue to limit their participation.
Crude futures contracts could act as hedging tools for refiners – which need to buy crude oil for their own use, rather than for trading purposes – with other hedging options limited.
But with price movements volatile, futures trading often can be riskier than over-the-counter dealing and speculative – a discouraging factor for traditionally conservative Asian refiners, traders at refiners said.
“$1 a barrel is equal to $500,000 per cargo,” said a crude oil trader at a Japanese refiner, referring to the typical size of a Middle East crude oil cargo. “We should be conservative.”
He said his company used to trade on the New York Mercantile Exchange about 15 years ago, but only ended up with losses.
“The problem is ‘greed,’” he said. “We called it hedging, but when losses appeared, we couldn’t close the positions.”
He said it would be a “nightmare” to start trading futures again, and his company has no plan to do so at the moment.
Some recent financial scandals show how companies can be hit by losses from financial vehicles designed to hedge risks related to their business.
In 2004, China Aviation Oil (Singapore), a unit of China Aviation Holding Co, the Chinese state-owned monopoly jet-fuel supplier, lost $550mn from oil derivatives trading in one of Singapore’s biggest ever financial scandals.
Last year, Japanese trading firm Mitsui & Co lost $81mn from its Singapore unit’s naphtha paper trading. And just this week – though not in oil trading – SembCorp Marine Ltd said it lost $248mn from foreign exchange trading.
Refiners welcomed the launch of DME, hoping it would provide new hedging instruments and eventually help improve the way Middle East crude oil is priced. The DME Oman futures contract is also physically deliverable, adding to its attraction for end users.
The exchange, a joint venture between Nymex Holdings Inc, the Dubai government and the Sultanate of Oman, was launched on June 1.
Along with the Oman crude contract, DME offers Brent-Oman spread and WTI-Oman spread contracts, which are settled financially.
Asian refiners are the major buyers of Oman crude oil, with output around 700,000 bpd.
Trading volume on DME was around 100-200 lots a day in the months following its launch, growing to 1,000-2,000 lots now. One lot is equivalent to 1,000 barrels.
“A rise in open interest on the exchange is a leading indicator that customers are becoming more confident with the Oman crude oil futures contract as the pricing mechanism for Middle East sour crude oil,” the exchange said in a statement.
DME Oman futures quotes are used to set Oman crude’s monthly official selling prices, a crucial backing for the exchange, although other Middle East crude oil producers, including Saudi Arabia, have yet to follow suit.
Qatar recently abandoned the link between its crude oil prices and Oman crude prices, saying it would price its crude oil independently of DME.
Yusuke Seta at brokerage Fimat Japan said BP, Royal Dutch Shell and Vitol have been the major players so far, but more trading houses and banks will likely enter the market next year, encouraged by the recent growth in liquidity.
“So far, the contract is showing good progress,” he said.
Some refiners in Asia have also tried out DME, but traders said DME trading has been mostly limited to the bellwether oil companies.
The trader at the Japanese refiner said the DME works well for those companies, as they now can sell their cargoes into the DME if they can’t sell them in the physical spot market at premiums.
Refiners could also buy cargoes directly on DME, but there is a risk that they will end up paying more than they would in the spot market, traders said. “It’s risky for us,” a trader at a major Japanese refiner said.
To keep up with constantly changing prices, refiners would also need their traders to trade on the screen daily, which would be difficult for them with limited resources, they said. – Dow Jones Newswires.