The Dubai Mercantile Exchange will be opening its doors for oil trading business on June 1. This exchange is jointly owned by the American NYMEX, the Omani Ministry of Finance and Tatweer, a holding company in Dubai.
Syrupy and sulphurous
Oman is not a member of Opec. Futures in Omani oil, which is comparable with that from the Emirates and with most of the oil found in the Middle East, will be traded on the DME. The substance of this oil is notably more syrupy than that of oil from Texas or from the North Sea, and it contains more sulphur.
This black oil is called heavy sour crude, whereas the oil from the North Sea is, for the most part, light sweet crude. A different composition means a different refining process. Heavy, sulphur-retaining oil demands more processing which makes refining such oil more expensive, and in order to achieve the same amount for the end product, like petrol, the basic product has to be cheaper.
The DME should have been the first exchange to trade futures contracts that represent heavy sour oil but the English equivalent of the NYMEX and DME, the Intercontinental Exchange, beat them to it; it introduced the first futures contracts in connection with oil from the Middle Eastern region back in May 2007. The price is based on the physical oil traded in Dubai.
Trading round the clock
The ICE keeps its doors open 22 hours a day for this and it looks as if 24 hour trading is taking serious shape. The big difference with futures contracts that will be traded on the DME is settlement. Contracts in London are settled in cash whereas futures on the DME will be physically settled. However, both futures contacts will contribute to an increasing transparency around pricing and, moreover, with these products the market will have better risk management tools available.