Dubai Mercantile Exchange starts auctions to shed light on murky oil pricing

The Dubai Mercantile Exchange has launched online auctions aimed primarily at regional oil companies looking for more transparent and fair pricing.

The exchange, which trades the benchmark regional crude futures contract, has been consulting with state oil companies in the Arabian Gulf for a year about a platform that would shed some light on the often murky pricing practices for crude oil and oil products.

The DME now regards the timing as ripe for the introduction of an auction platform as governments are keen to squeeze as much as they can out of contracts at a time of low oil prices.

They will also want best buying prices for petrol and diesel as they move towards liberalising their fuel markets, and they want to try to re-exert some measure of control amid rising Asian buying power. The energy world has an overly complex way of pricing that basically entails buyers and sellers self-reporting to various news agencies, which then average out the reported prices and post an official price for a given product on that day.

The methodology has been found over the years to be open to abuse and manipulation, especially since the growth of derivatives – for example, futures, options and swaps – which can be traded profitably by those in a position to manipulate the underlying commodity’s price.

Even apart from price manipulation, the arcane methods of tendering to sell crude oil or to buy petrol, diesel and other such products have been notorious in many markets for being open to abuse through sweetheart and back-channel deals between buyer and seller.

“It’s partly a factor of lower oil prices,” Owain Johnson, the DME’s managing director, said about the draw of an open auction alternative. “Companies that were not that concerned about 5 cents a barrel when oil prices were at US$110 a barrel are more concerned to ensure best pricing when oil is around $45 a barrel.”

But the auctions are also aimed at offering companies such as Abu Dhabi National Oil Company, Emirates National Oil Company, Saudi Aramco, Kuwait Petroleum and others in the region a straightforward and transparent platform for buying and selling.

“The auctions should do two things for buyers and sellers of oil, oil products and other commodities,” said Mr Johnson.

“They should get a better price by expanding the pool for any given tender, and the second factor is the buyer or seller can print off all the bids and offers and show them to their auditor.”

The success of the auctions will depend on the Gulf state oil companies using them on a regular basis.

While they have previously been cautious about transparency on commercial grounds, they may now be more eager to promote open trading.

For one thing, it is stated policy of the UAE government to promote a transparent market for fuels since August when it said prices for motorists would in future be set at “world” prices on a monthly basis. The Ministry of Energy has not said what world benchmarks it is using to set prices, but open DME regional tenders for petrol and diesel would be one way to promote open pricing.

It might also encourage other regional participants who have expressed a desire to follow the UAE’s example to liberalise fuel markets and reduce subsidies.

The Gulf oil companies have also expressed private worries about the growing pricing control of China, which has been the dominant Asian buyer of crude for some years.

In recent months, Chinese state oil companies have been by far the dominant buyers and sellers of the regional benchmark crudes that underlie the DME’s Oman futures contract.

Furthermore, the Shanghai International Energy Exchange confirmed that it would launch its own crude oil futures contract this year, giving China even more control over regional oil pricing.

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Anthony McAuley

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