Eastward Shifting Oil Markets and the Future of Middle Eastern Benchmarks

The recent increased Chinese activity in the Platts Dubai window is yet another manifestation of the eastward shift of international oil markets. In light of these changing dynamics, the necessity for a new marker for East of Suez crude oil pricing is commonly taken for granted. But must the benchmark for East of Suez necessarily move to Asia, or may strengthening the Middle Eastern benchmark system offer a feasible alternative? To answer this question, this comment briefly examines the factors underlying the current eastward shift of international oil markets. Subsequently, two candidates for an Asian marker for East of Suez will be presented briefly (ESPO Blend, Shanghai Crude Oil Futures Contract). Hereafter, the four main arguments for the necessity of such a new Asian marker will be presented and critically evaluated. Finally, a proposal to rebuild the current Middle Eastern benchmark system, in order to strengthen its position in times of eastward shifting oil markets, is outlined. The proposal aims at linking the physical Dubai market with the Oman futures market on the Dubai Mercantile Exchange. This would allow price signals from the physical Dubai assessment to feed into the DME Oman futures contract (and vice versa) as well as offer the opportunity for physical players to hedge the Dubai price exposure by means of the DME Oman contract. This comment argues that this would not only cope with shifting oil market dynamics, but also solve several issues currently weakening both the Dubai marker and the DME Oman futures contract.

By: Fabian Weber

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