Dubai Begins Trading In Fujairah Fuel Oil Contract.

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Dubai on Oct. 30 launched the first energy futures contract in the Middle East, kick-starting its aim to become a leading energy derivatives trading centre along with being the hub for the world's largest oil exporting region and for LNG. The contract, for fuel oil, is expected to be one of several launched by the Dubai Gold and Commodities Exchange (DGCX), which is backed by the Dubai Multi-Commodities Centre (DMCC).

DGCX's rival, the Dubai Mercantile Exchange (DME), plans to launch the Oman crude oil futures contract by end-2006. The DME's crude oil futures contract has the backing of the Oman government. DME is a joint venture between the New York Mercantile Exchange (NYMEX) and the Dubai government.

The Oct. 30 launch met with a muted response, however. Tilak Doshi expert in fuel oil trading and head of energy at DMCC, said six contracts had traded by early evening in Dubai, adding: "The big players in the market have played an active role in consultation for this contract. In the next few weeks I would expect them to come in with some significant and robust trades".

Doshi said major energy companies, fuel oil traders and futures traders had all been involved in consultation in the design of the fuel oil contract. The fuel oil is deliverable at Fujairah, a bunkering port close to Dubai, where DMCC has its own supplies.

Peter Heintzelman, head of energy at Standard Bank in Dubai, said both exchanges would have to market their contracts aggressively if they were to succeed. He said: "I think there is plenty of demand for the product. If there is confidence in the product people will use it. If there is not confidence it will not get off the ground".

DGCX's Fujairah 380 CST High Sulphur Fuel Oil Futures Contract is set to become a marker for the black part of the crude oil barrel. DGCX, the only commodity derivatives exchange in the Middle East, added this contract to its expanding portfolio of products which include gold, silver and currency futures. Fuel oil is the sixth futures product to be traded on DGCX before the exchange celebrates its first anniversary on Nov. 22.

DGCX's CEO Framroze Pochara said: "The fuel oil contract will cater to the needs of the oil players in the region by providing an efficient tool to hedge price risks for all participants. Of course, the region being one of the crucial oil hubs of the world, the contract will bring about a fundamental transformation in the way the course of actual physical trade in the product is determined. I am glad to say that with this contract, DGCX is hitting one more milestone in its drive for accelerating the growth of the commodities market in the region. This indeed is a historic moment for us".

The Fujairah 380 CST HSFO contract will trade six consecutive months in the future with January 2007 as the near month contract. The size of each contract will be 100 metric tonnes with delivery points in Fujairah. The contract assumes special significance given the role this fuel plays in the economy of the Persian Gulf region.

Bunkering accounts for 80% of the total fuel oil consumption in the UAE. The Port of Fujairah, competing with Singapore, now is supplying about 12m metric tonnes of bunker fuel annually. The volume will be increasing steadily in the years ahead so that Fujairah will become the world's biggest bunkering centre.

The introduction of fuel oil futures in Dubai will result in better price discovery and market dynamism for the oil-rich Gulf region. The next energy product to be launched on DGCX is the gasoline futures contract, which will be introduced in 2007.

DGCX is a fully automated, online commodities exchange. Strategically located in Dubai, the exchange is the first international commodities derivatives marketplace in a time zone between Europe and the Far East. DGCX is a JV between the Dubai Multi Commodities Centre, (DMCC), Financial Technologies (India) Ltd (FTIL) and Multi Commodity Exchange of India Ltd. (MCX). Additional products at DGCX will feature options on gold and silver futures. A diversified range of commodities such as steel, marine fuel oil, freight rates and cotton will be introduced for trading as the exchange progresses further.

DMCC is promoting a hub for LNG in Dubai, where a storage facility for liquefied methane is to be built at the cost of more than $1 bn. This will be a JV to include Techno Part of Dubai, a company representing an economic zone where the storage facility is to be based, together with LNG Impel. The latter is a marketing unit of Galveston LNG of Calgary. This will be the first project of its kind in the world. It will be a spot market for LNG linked neither to a production base nor an end-user.

The facility will have a capacity of 1.8m-3.1m cubic metres of storage, depending on demand. A minimum of nine 200,000 CM tanks will be built in three annual tranches, with construction to begin by early 2011. Petroleum Argus on Aug. 28 quoted Ed Elrahal, regional head of LNG Impel, as saying: "The beauty of Dubai is that it is almost equidistant from Asia-Pacific and Europe". Argus quoted DMCC's energy head Doshi as saying: "We believe our model is very robust. The LNG market is changing and becoming more fluid. We are providing this opportunity to be more flexible".

The LNG project promoters are soliciting interest before requiring firmer commitments. The aim is to ensure around 60-70% of capacity is booked before a final investment decision is taken. Doshi said: "If we have interest from the market, financing is not an issue". According to Argus, industry response to the initial proposal has been mixed. Argus quoted John Meagher, LNG analyst at consultants Wood Mackenzie, as saying: "It is an interesting concept. But there are a lot of challenges that have to be addressed".