Switching it up

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Should Saudi move to price off the DME, it would likely make it the benchmark for some 12 million barrels per day (bpd) of Gulf crude exported to Asia.

Saudi Arabia is all but certain to adopt the Dubai Mercantile Exchange’s (DME) Oman Crude Oil Futures Contract as its benchmark, oil traders say. The main question is when, not if, report Judy Hua and Luke Pachymuthu.

The growing confidence that state exporter Saudi Aramco will eventually abandon the Dubai/Oman crude assessment price as its basis for Asian exports is bolstered by two things: the tone of recent discussion between Aramco and its customers, and its abrupt switch to a Gulf sour crude benchmark for all US sales.

But nagging concerns — including the relative illiquidity of the DME market, the large share of production held by a single company and the lack of substitutability — mean traders appear undecided about when such a transition would occur.

In a Reuters straw poll of twelve traders and refiners, who represent about a tenth of Saudi crude shipments to Asia, two said they expect the kingdom to make the change next year. One said 2011, and four said it could happen around 2012.

The rest declined to give a definite answer on timing, but nine of the twelve agreed that Aramco would likely change the way that nearly half of Asia’s crude oil is priced, addressing years of concern over dwindling liquidity in the existing Dubai marker and allowing refiners to hedge their exposure on an exchange.

“I will say next year or never. There is a limit to how long you can give the patient mouth-to-mouth,” said one trader.

A Saudi move to price off the DME — which would almost certainly be followed by Kuwait, Iraq and Iran — would likely make it the benchmark for some 12 million barrels per day (bpd) of Gulf crude exported to Asia, where China and India are set to take a much larger share of future world oil demand. About half of Saudi oil exports are shipped to Asia and this is set to rise.

It would also provide a much-needed liquidity boost for the DME, which has struggled to expand activity beyond a handful of traders, producers and refiners who mainly use the market as a way to sell or procure physical supply, not to hedge.

The kingdom has been seeking feedback from its customers on the DME since the middle of 2008. Discussions intensified early this month at the annual Asia Pacific Petroleum Conference (APPEC), as well as during follow-up meetings with at least one major refiner in the region, multiple sources told Reuters.

They began sounding out Asian customers almost a year before they started discussions with US buyers about dropping the US light sweet crude benchmark, which had become increasingly volatile, particularly at the front end of the curve.

Last month it dropped WTI for the Argus sour crude index, the first major change in its global benchmarks since it abandoned Europe’s Dated Brent nearly a decade ago, and raising expectations the Kingdom may be ready for a change in the East.

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