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Gulf-Times: Sudden Oman futures spike puts pricing risks in focus

Published: Thursday, 27 December, 2007, 03:37 AM Doha Time
 
SINGAPORE: Oman crude oil futures on the Dubai Mercantile Exchange surged last week, regardless of market fundamentals and movements in other benchmark crude oil futures, which highlights old risks involved in the pricing of Middle East crude oil.

The unusual movements on DME show how a handful of big players can affect prices on the exchange, and less influential participants, such as end-users, can be hit as a result.

The problem is by no means unique to the six-month old exchange – Middle East crude oil traders have long voiced similar concerns about Platts’ trading window, through which Dubai crude prices are set.

Nearly all Middle East crude is directly or indirectly linked to Dubai prices assessed by Platts, a unit of McGraw-Hill Co (MHP), based on deals done during a window period.

The February contract for Oman futures on DME settled at $90.07 a barrel at the end of trading in Asia yesterday, up $1.54 a barrel from Tuesday, while Brent and New York Mercantile Exchange crude futures were little changed, also hovering around $90 a barrel.

Oman crude is a medium sour grade, which is a lower quality than light sweet Brent crude traded on London’s ICE exchange and light sweet West Texas Intermediate crude traded on the New York Mercantile Exchange, so its prices are typically much lower than the Western crude grades.

Yesterday’s settlement price for February Oman futures was more than $4.50 a barrel higher than Platts’ Dubai price for the day, according to traders.

Under normal circumstances, “nobody would buy Oman at such a high price,” a trader at an oil trading firm said.

In the physical market, Oman crude usually trades at premiums of around $1a barrel to Dubai.

The exact cause of the spike in Oman futures wasn’t clear, but traders said the likely culprits are trading houses, which could have been trying to cover short positions through the exchange.

“I’m not sure, but (in the previous week), some traders were selling Oman without physical cargoes,” a trader at a refiner said.

Rising Oman futures prices on DME will bite buyers, particularly refiners, as Oman crude’s monthly official selling prices are set based on DME quotes.

“It’s very bad for end users, as this means Oman OSPs will be high,” the trader said.
Since the launch of DME on June 1, Oman has used the average of daily DME Oman futures settlement prices during a month to set the OSP for loading two months later.
DME is a joint venture between Nymex Holdings Inc, the Dubai government and the Sultanate of Oman.

DME is the only exchange that offers physically deliverable sour crude oil futures, so it attracts players that need physical cargoes.

Trading houses that are short of physical cargoes to deliver to their buyers, for example, can use the exchange to cover their positions.

The volume of contracts going into physical delivery has been increasing, reaching 5,977 contracts, or an equivalent of 5.997mn barrels, in November, DME said.

Trading, however, has been largely limited to major oil companies, led by Royal Dutch Shell, which are active across the sour crude market, leaving smaller participants vulnerable to abnormal price movements, traders said.

In September, Shell went on a Dubai crude buying spree during Platts’ trading window, pushing Dubai prices higher and catching refiners off guard.

The average of Platts’ Dubai quotes for September was at a then-record high of $73.36 a barrel, consequently pushing up outright prices for Middle East crude for the month.
Some traders said such price plays on DME can be of greater concern to buyers than on Platts’ system, as traders can’t see the identities of sellers and buyers on the exchange.
“In the Platts window, we can at least watch who bought and who sold,” the second trader said. – Dow Jones Newswires
 
Gulf Times Newspaper, 2007 ©

http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=192283&version=1&template_id=48&parent_id=28

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