Big physical Oman oil delivery may haunt DME in '08

By Maryelle Demongeot

SINGAPORE (Reuters) - Six months on, the main selling point for the Dubai Mercantile Exchange's Oman crude futures contract could also be its biggest obstacle, if traders continue to use the facility as a way to buy or sell physical oil.

As the first Middle East contract to offer an option to deliver physical crude at expiry, the DME has attracted a host of oil majors, trading companies, producers and refiners willing to take the chance of supplying or accepting 500,000-barrel cargoes.

But hedge funds, speculators and local players who can help build liquidity and ensure its success as a futures exchange, could be deterred by the unusually large volumes carried to delivery -- 6 million barrels in the January contract.

This equates to about 193,000 barrels per day (bpd), or a quarter of the total production of Oman crude and condensate, and many traders expect that volume to continue.

By contrast, physical delivery of U.S. crude as traded on NYMEX, the world's most liquid oil contract, exceeded 4 million barrels only once in January 1995.

"I am sure physical delivery will be constant this year. There is no reason for it to change," said a trader with an investment bank.

The DME has managed to survive the curse of many past Middle East crude contracts, which have failed within months, but has yet to establish itself as a viable vehicle for hedging and speculation.

Where other major benchmark contracts such as NYMEX's West Texas Intermediate (WTI) crude or ICE Brent see open interest decrease as the contract expiry approaches, the Oman contract displays the opposite behavior.

Open interest for the front-month February Oman contract stood at 3,873 on December14, the day for which the latest data is available.

This compares with 3,658 lots on November 15, leaving the door open for a record physical delivery of February Oman crude.

Those contracts represent about half of the exchange's total open interest, showing the focus on the first month's contract and its physical delivery, which has become increasingly popular with traders.

"Lots of players see the DME as a decent and flexible way to access physical Oman," a Singapore-based trader said.

Adding to the momentum, term contracts for 2008 Oman crude have given a growing role to the DME.

Traders say the largest seller of Oman crude, Shell, is selling most, if not all, of its Oman equity through the exchange to trading firms that have taken the bet they will be able to fill short positions with refiners on the exchange.

"Shell did not sign term contracts with Chinese traders this year and even Japanese companies are said not to have signed with them. So they are selling a lot through the DME," another Singapore-based trader said.