UAE - Trade & Pricing.

The Dubai government allows its crude oil to be traded freely, whereas the other oil exporting governments in the Middle East put restrictions on their sales. The export blend, called Dubai, is heavy and sour of 32.5 deg. API gravity with 1.7% sulphur.

Dubai is the world's marker for trading in heavy/sour crudes. Iran and its Arab Gulf (GCC) neighbours price their east-bound crude oil sales according to the average spot market prices of Dubai and Oman crudes. The price of Oman, a lighter and sweeter crude relatively rich in distillates, is determined to a large extent by the spot market value of Dubai.

The market value of Dubai, as a benchmark, is assessed mainly in terms of spreads against Dated Brent - a light/sweet grade which is the marker for most of the world's crude oils.

The physical trade in Dubai, however, is lacking in transparency and has become illiquid, because its output has fallen to less than 10 cargoes per month. As the volume is too small to sustain a spot market, Dubai has become subject to manipulation. Only eight or nine cargoes of Dubai per month are traded on spot basis. This limitation means the spot price of Dubai is influenced by large liftings.

If a company loads two VLCCs within days, the spot price of Dubai rises quickly irrespective of the situation for Dated Brent. But the offtaker using VLCCs would only buy when the spread between Dated Brent and Dubai is wide, i.e., when the spot market value of Dubai is low enough for the buyer to jump to the opportunity.

In Feb. 2002, Shell and Wall Street trader J. Aron exercised their seller's option to supply Oman - in place of Dubai - into several Dubai-related contracts. According to Petroleum Argus on Feb. 18, the contracts valued Oman at a premium of 5 cents/barrel over Dubai. It was the first time that Oman was delivered in place of Dubai since Nov. 2001, when Platts said it would start taking such trades into consideration in assessing Dubai values. Usually Oman commands a higher premium over Dubai.

Oman sellers looking for Asia-Pacific buyers in the second quarter of 2002 also face what Argus calls "a flood of competing arbitrage supplies" of Brent from the Atlantic. The price differential between spot Dubai and Dated Brent now is narrow, which encourages holders of Brent-linked grades to move cargoes into the eastern markets. Occasionally spot Dubai traded at a premium over Dated Brent, as has been the case since early June 2002. On June 12, Dated Brent fetched $22.77, while spot Dubai closed at $22.88. The spot price of WTI, a light/sweet US marker which does not trade out of the American market, closed at $24.40.

The state-owned Indian Oil Co. (IOC) is one of the largest buyers of Dubai. At times it takes full advantage of low Dubai prices and buys large cargoes of the crude when the spread is wide.

Dubai has had a role in the NYMEX futures market since May 2000, when the New York Mercantile Exchange launched a sour crude contract based on Dubai. But because this contract has failed to gather adequate liquidity, the trade has been dominated by buyers. Charges of price manipulation is undermining the contract's credibility.

Brent and WTI also have become vulnerable markers. The volume of Brent in physical trade has fallen considerably in recent years, at times reaching 400,000 b/d or below. WTI futures at NYMEX have become vulnerable as well.

BP was in May 2002 reported to be behind premia of more than $1/barrel on first-month WTI over second month, reversing a discount in April. BP is the largest storage operator at the Cushing delivery point for WTI, with 10 million barrels representing 37% of that area's storage capacity.

Because of a shortage in infrastructure capacity at Cushing, where a slight shift may cause WTI futures and spot prices to rise or fall sharply, NYMEX has been advised to move its WTI delivery point to the Gulf coast. While stocks at Cushing are low, those on the Gulf coast are high.

OPEC's crude oil supplies are expected to remain restrained during the third quarter of 2002, with the organisation's current oil production ceiling being 21.7 million b/d. OPEC's next ministerial meeting in Vienna on June 26 is expected to extend this ceiling to the third quarter.

After talks in Jeddah with OPEC Secretary-General Ali Rodriguez, Saudi Petroleum Minister Ali Naimi said earlier this month OPEC had "no intention" of raising production at the June 26 conference. He added: "Current (crude oil) prices are within the required limits and within the approved price band" - with the value of US dollar-denominated oil income having fallen by more than 7% this year and could drop by another 14%.

Rodriguez, who recently became President and CEO of Petroleos de Venezuela, confirmed that OPEC will keep the ceiling unchanged.

Trade In Dubai Swaps: While the volume for spot trading in Dubai has declined, swap deals in this crude oil have risen since 1997. These are contracts based on the future value of published price assessments, with the swap being one of the hedging tools.

Swaps are generally in small lots of 50,000 to 100,000 barrels or in lots as large as 500,000 to 1 million barrels. They relate to assessments over a calendar month (see APS survey on oil trading in Vols. 42 & 43). Chinese traders began the trend for Dubai in 1997 as they took large positions to hedge their physical crude oil imports. They were followed by Shell, Vitol, Morgan Stanley and BP.