7th APRIL 2015 - Vol.XXXVIII No.018
Business News

Dubai futures market faces hurdles with new contract

SINGAPORE: One year after launching the world's most eagerly anticipated oil futures contract in a decade, the Dubai Mercantile Exchange (DME) is back with a follow-up it hopes will kick trade into a higher gear.

Unfortunately, say traders, the two new contracts - which are meant to appeal to financial traders by sidestepping the risk of making or taking physical delivery of Brent or Oman crude - may face exactly the same problem as their predecessors.

"It's a chicken and egg problem. Unless an exchange already has liquidity, nobody wants to participate," said Tokyo-based Mitsubishi Corporation risk management executive Robert Nunan.

The DME launched its Oman contract to much fanfare last year, touting it as the first Middle East futures sour crude oil contracts to have the backing of local governments - both Oman and Dubai are shareholders - and offer physical delivery.

It has already succeeded to some degree, outlasting previous failed efforts to launch sour crude contracts and posting generally rising trading volumes last year.

But volumes have come off the highs reached early this year, indicating some participants may be giving up hope that it will become a benchmark for the vast and growing exports of Middle Eastern crude to Asia.

And at the same time physical delivery continues to rise, showing how most traders on the exchange are using it as a means to buy and sell physical Oman crude, rather than to speculate on future prices or hedge their exposure, which would add more liquidity.

Last month, daily trading volumes on the DME Oman contracts averaged 1,225 lots, almost half the 2,000 on average in the beginning of the year.

The danger of being stuck with - or forced to deliver - a cargo of Oman crude in a less than liquid market has kept an entire group of financial players away, traders say.

And while the new cash-settled Brent and Oman crude contracts due to launch on June 2 will ensure no one gets caught having to deliver or take physical crude, the fact that it is cash-settled against the existing contract means it is still subject to the other problems that plague the physical contract.

"The financial contracts will be different in that they are not physical but people who will trade them will still be exposed to high volatility," said a trader with an investment bank, who trades the current contract and plans to trade the financial contract too.

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