The Dubai Benchmark and its Role in the International Oil Pricing System
Despite the existence of other regional crudes with a much larger physical base, more than 25 years have now passed, and most cargoes from the Gulf destined for Asia are still priced against Dubai. Nevertheless, the nature of the Dubai benchmark has evolved and many of the institutional and pricing details have witnessed major transformations, driven in large part by the decline in Dubai’s oil production and innovations in the pricing mechanisms introduced in the 2000s. In theory (and in practice to some extent), the price of Dubai may be identified from the financial layers that have emerged around Dubai and Brent. The Brent complex sets the price level for Dubai while the EFS and the inter-month Dubai spread market set the price differentials against Brent. Since physical benchmarks constitute the pricing basis of the large majority of physical transactions, some observers claim that derivatives instruments such as futures and swaps derive their value from the price of these physical benchmarks. However, this is a gross over-simplification and does not accurately reflect the process of crude oil price formation in the case of Dubai.