Gasoline and jet fuels help exchanges lift off

Dubai’s commodities exchanges, combined with Dubai and Fujairah depots, to turn the UAE into regional hub

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By  Administrator Published  August 31, 2006

In the Gulf race to become the regional energy trading centre, Dubai is leaving Qatar in its dust, while the controversial and much talked about Tehran oil bourse has yet to make it to the starting blocks.

The prize is taking the pole position to challenge Singapore, London and New York as a global player trading Middle East hydrocarbons.

Later this year, Dubai Gold and Commodities Exchange (DGCX) plans to launch marine fuel futures, to be followed by gasoline futures in 2007. Joining it, the Dubai Mercantile Exchange (DME) will offer Gulf benchmark crude contracts this year, and plans to sell jet fuel futures too, but has not set a date yet.

Farther ahead, Dubai’s planned giant liquefied natural gas (LNG). storage depot, may lead to LNG derivatives and spot trading, further consolidating Dubai’s reputation as the commercial capital of the Middle East.

Dubai Multi Commodities Centre (DMCC) is involved in developing the storage facility. It is the DMCC that is in the exploratory stages of developing next year’s gasoline contract for the DGCX.

The exchange started trading last year and is the first international commodities derivatives marketplace in the time zone between Europe and the Far East.

Tilak Doshi, executive director for energy at DMCC, said: “Gasoline pricing practices in the Middle East are in need of serious reform, having long ceased to adequately serve the region’s need for an efficient and transparent pricing system.”

“Currently, pricing for gasoline is based on a mix of pricing references which include a freight-adjusted Mediterranean basis, Singapore-basis, and a regional naphtha quote, which itself is a “net-backed” price from the Far East,” Doshi said.

“In an era of ever-higher and volatile prices, [DGCX gasoline futures] would provide an efficient tool to hedge price risk for both consumers and refiners in the “East of Suez” region,” he said.

Gasoline is the only hydrocarbon fuel in which the Middle East as a region is net short-—Iran is one of the world’s largest importers of it.

DMCC’s proposed gasoline futures contracts reinforces Dubai’s position as a natural hub for the gasoline trade, which encompasses the Gulf, Europe and the Mediterranean, East Africa and Asia. The emirate has already attracted significant infrastructural investments in gasoline storage and blending activity, both in Jebel Ali and Fujairah.

Framroze Pochara, chief executive of DGCX said: “We constantly strive to introduce on the DGCX platform new products which are of use to the industry. This contract will provide an efficient tool to hedge price risk for both the consumers and the refiners. An efficient price discovery mechanism for gasoline in the region would further consolidate the storage and blending centres of Jebel Ali and Fujairah in their role of linking the exports of the Mediterranean and Asia to the needs of the Middle East and Africa.”

Fujairah is also the World’s third-largest marine fuel centre, after Singapore and Rotterdam, and is strategically located outside of the Arabian Gulf and away from Iranian missile sites.

The DGCX will sell shipping firms the fuel that powers their oil tankers at a price fixed in advance. This will allow them to manage their fuel budgets better than they currently can by buying marine fuel in Singapore at de facto an unknown price, and picking up the bill when they leave port.

Likewise, there is an active physical trade in gasoline in the UAE, which will support gasoline futures trading. It already involves a wide number of industry participants, ranging from national oil companies to trading houses and major oil companies. Key players in the regional and global gasoline markets such as BP, Emarat, Enoc, Shell, Trafigura and Vitol are already active players in Dubai’s role as the hub of gasoline trade.

Not to be outdone, the the Dubai Mercantile Exchange (DME) plans to develop refined products contracts, including jet fuel

“Our focus is getting the crude oil launched first and then other products after that. The next one will be jet fuel,” said Gary King, CEO of DME, a joint venture between Dubai and the New York Mercantile Exchange.

He said market response has been enthusiastic for the crude futures contract, which traders said could boost market liquidity and help reshape the way Asian refiners and traders price their crude.

It will be launched on the new exchange in the fourth quarter 2006 and will be based largely on Omani sour crude—the first time an Arab producer has backed such an exchange.

However, the success of the venture is not guaranteed. State oil companies of Gulf Arab producers would find it easier to back new refined product contracts as price benchmarks than support crude future contracts, an official at state-owned Bahrain Petroleum Co. (Bapco).

Adel Al Moayyed, general manager marketing at Bapco, said Gulf Opec producers were likely to be cautious about changing the current bases for oil prices.

“As a state oil company official, I say for state oil companies it would probably be more palatable to them to use product prices to start with, before crude. Somehow products is less political and sensitive,” Moayyed said.

“If a future attempt succeeds in bringing some critical mass... I think we would be less reluctant, we would encourage it to bring transparency to our product prices,” he told an energy conference in Abu Dhabi.

It will take a longer time to sell to them,” Moayyed said.

King said: “I don’t think that’s a fair comment—people need to manage their risk and many people have said they’ll use this contract to manage their risk.”

“There’s significant interest in the contract from across the industry from producers, risk managers, refiners and airlines,” he said.

“We’ve gone around the industry internationally. We’ve collated the responses from the industry and we’re incorporating those comments into the contract.” King said.

Oil traders support the exchange, and have called for a more liquid pricing benchmark for Middle East exports, which largely rely on the published price of physical Dubai and Oman crude on the basis of trade between a handful of players.

In contrast, US and European oil trade is underpinned by huge amounts of liquidity generated by futures contracts for US and UK crude.

Refiners are also enthusiastic about crude futures as it will help them manage risk. Currently, the only tool available to them is projecting Middle East oil and jet fuel costs based on US and UK benchmarks.

But the exchange’s success depends on producers releasing enough oil to be sold on it. And some analysts think a chicken and the egg scenario might develop, where lack of liquidity at the start results in a wary response. Furthermore, unlike other exchanges that trade crude futures, it is not undepinned by an active spot market with vast liquidity.

King said details of the contract terms including pricing are still being reviewed. “We’re still in the middle of all these issues and it’’ll be released very shortly.” And the DME expects its jet fuel futures to ride on the crude contracts success, he said.

“Dubai is a booming transport hub. It’s one of the fastest growing market in the world for air traffic and we want to be part of that story.”

Which contracts consumers and producers go for will determine which exchange is most successful.

As for Qatar and Iran: Doha has yet to say what contracts it will sell or when its exchange will open, and few analysts think that Tehran-—which struggles to refine gasoline-—will ever
enter the race.

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