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Oil Futures Launch May Turn Dubai Into Derivatives Hub.

Dubai launched the Persian Gulf's first fuel oil futures contracts last month which could mark the beginning of the emirate's transformation into a new energy derivatives trading centre. Dubai is also becoming a trading centre for crude oil and liquefied natural gas (LNG).

The year-old Dubai Gold and Commodities Exchange (DGCX) began trading the Fujairah 380 CST high sulphur fuel oil futures contracts on Oct. 29 to add to its other products - gold, silver and currency futures. But until Nov. 13, no contracts had been traded. Framroze Pochara, DGCX's chief executive, says: "I think the energy market players are still gearing up for this. There is a lot of interest, people want to trade these contracts because of a lot of this trading takes place out of Singapore. People have to get their credit lines in place, their procedures in place. That is taking a bit of time but there is definitely a lot of interest". Analysts say energy futures contracts sometimes take a while to develop liquidity and a fuel oil futures contract launched in Singapore in September has not traded yet. Heavy fuel oil, also known as bunker fuel, is used to power ships and plays a key role in the region's economy.

Bunkering accounts for 80% of the fuel oil consumption in the UAE with the Port of Fujairah supplying about 12 million tons/year of bunker fuel. Fuel oil futures with Fujairah delivery will help oil industry players better protect themselves against adverse future price movements. It will improve price discovery.

Industry players currently use the over-the-counter market to hedge price risks and the development of a futures market will lead to a more efficient hedging mechanism. DGCX, the region's only commodities derivatives market, plans to introduce a gasoline futures contract in 2007, the only product of which the Middle East region as a whole is a net importer. The DGCX, however, is not the only exchange in Dubai that will offer energy futures contracts.

Oil producer Oman and the Dubai Mercantile Exchange, a JV between a Dubai Holding unit and NYMEX, are launching a sour crude futures contract. Its introduction will take place in early 2007. (Despite its status as the world's largest hydrocarbon region, the Middle East still lacks a robust and liquid price discovery mechanism for its crude oil. The two leading crude oil futures benchmarks, WTI and Brent, reflect the value of sweet crude oil, not Middle East sour crudes). The sour crude contract, backed by the Omani government, will be physically delivered using the Mina al-Fahal crude oil storage and loading facilities in Oman. The contract size will be 1,000 barrels and settled daily at the close of the Singapore trading day, in recognition of the fact that Asia is the biggest market for Middle East crude.

In September, DME signed an agreement with the Dubai government-owned Emirates National Oil Co (ENOC) to develop a jet fuel futures contract to be traded on the exchange in 2007.
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Publication:APS Review Oil Market Trends
Date:Nov 27, 2006
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