RIYADH, 13 October 2006 — A senior official at the Ministry of Petroleum and Mineral Resources said yesterday the Kingdom strongly supports the idea of a Dubai-based new oil exchange, especially considering the steep rise in demand in Asia, which currently has no “meaningful” dedicated exchange for oil.
“The establishment of a new oil exchange is very important for the region, both for the producers and consumers for many reasons,” Ibrahim Al-Muhanna, an adviser at the ministry said in an interview with Arab News. “It would help bridge the gap between the European and Asian markets in terms of time zones. Second, Asia does not have a meaningful futures oil exchange market, which is expected to increase over the coming years.”
However, he said that Saudi Arabia does not plan to engage in futures trading of its crude, although it would allow its financial institutions to engage in futures trading “in Dubai or anywhere else.”
Al-Muhanna was remarking on Dubai’s initiative for setting up an oil exchange market for Asia, an idea that he says has the support of Saudi Arabia and would have global implications.
Al-Muhanna also said there is particular need for a well-established crude exchange market for heavy sour crude, a large part of which is produced in the Gulf region. The establishment of an oil exchange market in Dubai using Omani crude as a marker would be “an important step in the right direction,” he said.
He pointed out that the currently Asia depends on the bourses in London (IPE) or New York (NYMEX), but also said that any move to set up an Asian exchange would be complicated, requiring commitments from major institutions.
“The New York Mercantile Exchange tried to set up an Asian Petroleum Exchange in Singapore in which Saudi Arabia took part in the discussions and study of such a goal. But it didn’t work out for many reasons,” he said.
Al-Muhanna said the time might be riper for Dubai’s proposal to go through, adding that the proposed oil exchange would deal with a new type of crude — high sulfur and sour crude — for the Asian market, where demand for oil is expected to outpace the West in this century.
Many questions still linger regarding details of this proposed new futures exchange. For example, would all types of crude be traded, such as Brent and West Texas? Saudi Arabia sells its oil on a contract basis, rather than on the spot market, and does not intend to use its crude as a marker.
Al-Muhanna said a Dubai oil futures exchange would increase transparency and stability and make forecasts of the global oil market easier. He points out that Asia already consumes 60 percent of Saudi Arabian oil exports.
“We don’t sell our oil to middleman, nor do we sell it to traders,” said Al-Muhanna. “We sell it only to oil companies, which have refineries all over the world.”
Regarding Saudi Arabia’s unwillingness to dabble in oil futures, Al-Muhanna said that officials consider it too risky.
“We try to avoid any type of risk,” he said. “More importantly, Saudi Arabia is the largest oil producer in the world and it has a great influence on the oil market. Therefore, participating on the futures oil market by Saudi Arabia will increase speculation and misunderstanding.”
Saudi Arabia prices its oil by basing it on Brent crude in Europe and prices in Dubai and Oman when selling to Asia. The Kingdom has five types of crude oil: super light, extra light, Arab light, Arab medium and heavy crude. The Kingdom produced nine million barrels per day.