Dubai-based Raja Kiwan of energy analysis firm PFC Energy said incessant price deviations that occur in DME contracts vis-à-vis Platts assessments towards the end of each month are creating difficulties for the exchange in generating liquidity.
As per the latest DME data, while the exchange recorded 840 contracts on July 13, it registered 3,385 contracts in the previous closing session on July 10.
“There are price distortions between DME and Platts physical assessments, particularly toward the end of each month. The main reason is a lack of trade liquidity on DME that leads to squeezes on traders wanting to exit their positions,” Kiwan told Emirates Business.
“Despite the link with the underlying physical markets for both Oman and Dubai crude streams, regional national oil companies have thus far eschewed DME as a price basis for setting their own OSPs, instead continuing to rely on Platts assessments of the physical spot markets,” Kiwan said in his study published yesterday.
“Aberrant pricing spikes occur with disturbing regularity toward the end of each month, ascribed by some to continuing problems with illiquidity on DME ahead of contract expiry.”
DME announced last mon-th that official selling prices for Dubai crude would be set by the settlement price of the exchange’s Oman contract. Terming this move “a significant shift”, Kiwan said the next critical step for a fully successful DME contract – adoption of the exchange’s settlement prices as the basis for the OSPs of the major Gulf producers for their term sales – remains elusive.
DME has been trying hard to attract major oil producers in the region to price their produce on the basis of their contracts. Attempts to lure the region’s largest producer – Saudi Aramco – were made even before the exchange was established.
Affirming the sentiments of traders, Kiwan said the markets received the initial news well, as trading on DME rose sharply following the announcement. While the exchange traded 8,076 lots that particular day, it settled back on 3,000 contracts per day later on.
“The exchange is still far from achieving the required number of trades (15,000-20,000 per day) to make it a profitable free-standing platform,” he said.
Kiwan acknowledged that the exchange’s revenue is rising, albeit slowly. Contrary to confidence expressed by officials at Platts, he said Platts assessed trades of Dubai swaps are shrinking rapidly. “The growth curve has been a slow one, but many of the teething problems of the first year or so have been gradually ironed out,” he added.
The comments come a day after DME announced that traders registered at DME who want physical delivery of crude will be charged 35 per cent less than what they earlier paid to trade the contract (initial margin).
Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.