UAE - Part 2 - Dubai's Petroleum Trade & The Union's Logistics.

Dubai exports all of its crude oil output, which is averaging about 100,000 b/d compared with a peak of 425,000 b/d in October/November 1990. By 2015, Dubai will have become almost totally dependent on oil and gas imports from neighbouring Abu Dhabi and other GCC sources. By then, according to a programme started in early 1997, the contribution of non-petroleum sectors to Dubai's GDP will have reached 100%. But Dubai will remain a player in regional oil trade.

Oman and the Dubai Mercantile Exchange (DME) on April 18 announced they will jointly launch a sour crude oil futures contract in the fourth quarter of 2006. Oman's willingness to support the electronic DME - a JV between Dubai Holding unit Tatweer and the New York Mercantile Exchange (NYMEX) - could help reshape the way Asian refiners and traders price their crudes. With NYMEX being the largest energy exchange in the world, its move into the DME is Americanising global oil trade.

While the Middle East is the world's largest petroleum region, it has yet to develop a transparent futures contract. The two leading crude oil futures benchmarks, West Texas Intermediate (WTI) and Brent, reflect the value of sweet crude oils, and are therefore not representative of Middle East sour crudes.

The statement said the collaboration between Oman and the DME acknowledged the need for a robust and liquid price discovery mechanism for Middle East crude oil. Oman's Under-secretary of Oil and Gas Nasser bin Khamis al-Jashmi said: The creation of a successful, physically linked Middle East sour crude oil futures contract is a concept we sincerely support, given our role in the pricing of Middle Eastern crude. In this respect, we believe the timing is opportune to lead this initiative and very much look forward to receiving market feedback on the contract".

Since signing an (MoU) in February, the two parties have undertaken an intensive analysis of the benefits and implications of developing an Oman-backed physical crude oil futures contract. Under the terms of the MoU, a working group was established to identify the elements necessary for creating a successful, physically linked Middle East sour crude oil futures contract. The group, consisting of top officials, reported its findings to the joint steering committee comprising senior leadership from both Oman's Ministry of Oil and Gas (MOG) and the DME. The panel unanimously approved the group's findings and instructed it to engage the energy and financial communities on the specific terms of the draft futures contract in preparation for launch in the fourth quarter of 2006.

DME's CEO Gary King said: This initiative will open alternative investment channels for the development of its energy and capital markets. The new electronic exchange will provide the means to manage price and credit risk transparently".

The state-owned Dubai Metals and Commodities Centre (DMCC) announced recently that it expected to launch a fuel oil futures contract in the fourth quarter of 2006. The contract will be for 380 centistoke, 4.5% fuel oil, which will trade in 100 ton units for physical delivery. Petroleum Argue on May 8 reported that DMCC had taken an option on two fuel oil storage tanks in Fujairah totalling 755,000 barrels.

The DME still has to address important issues, including how to match physical delivery of 500,000 barrel cargoes with futures contracts likely to be in 1,000-barrel lots. The contract comes at a time when Oman's crude oil sales are falling. Oman's output is below 700,000 b/d. Oman's 85,000 b/d refinery at Mina al-Fahl runs entirely on the sultanate's crude. A further 80,000 b/d of Omani crude will go to the 116,000 b/d Sohar refinery which was to be on stream in late May 2006 (see survey of Oman in the current volume, Nos. 5-8).

The FT on April 18 quoted King as saying: Without the backing of an oil producer, it would have been very difficult to launch a contract. This means that the physical price of oil and the paper price will converge".