(Recasts, adds details, trade comment)
DUBAI, May 30 (Reuters) - The Dubai government gave a vote of confidence to the Dubai Mercantile Exchange’s new Middle East crude futures on Wednesday, two days before their launch, pledging to use the contract to price its oil.
The shift in pricing will directly affect less than 100,000 barrels per day (bpd) of crude produced in the emirate. But oil traders said it would compel more market participants to use the DME's Oman crude contract, giving the NYMEX-backed NMX.N exchange an edge over its rival, Atlanta-based ICE ICE.N.
Dubai’s move comes six months after a similar shift by the sultanate of Oman, whose backing marked the first time a Middle East producer had lent its direct support to an oil futures contract. Oman produces more than 700,000 bpd of crude.
Both governments own stakes in the DME, together with the New York Mercantile Exchange (NYMEX).
“The government of Dubai will cease pricing its export crude oil sales off its current mechanism and instead utilise DME futures prices upon launch of the exchange,” the DME said in a statement.
Dubai’s government previously priced its oil based on daily market assessments by energy pricing agency Platts.
The DME’s Oman contract will begin trading on Friday, 11 days after the IntercontintentalExchange (ICE) launched a rival Platts-linked Dubai crude oil futures contract in a race to establish dominance as the Middle East’s primary benchmark.
Platts prices based on spot market trading of both Oman and Dubai crude are now used as benchmarks for around 12 million barrels per day of Middle East oil exports to Asian refiners, around 15 percent of global supply.
The Dubai derivatives market is more developed and has always been the dominant of the two grades. That balance could shift after Dubai’s decision on Wednesday.
“Oman has always been a slave to Dubai. But now those selling Dubai, if they decide to sell it for a flat price, will have a risk (exposure) to DME prices,” said one trader. “It means that everything will now trade as a spread to the DME.”
Oil traders said that the Dubai government would have to set a monthly premium or discount to account for the difference in quality between the two types of crude.
Other market sources saw the change as a symbolic credibility boost for the DME. The world’s largest oil exporter Saudi Arabia has yet to signal a shift toward the DME -- the ultimate sign of success.
Oman’s backing raised expectations among oil traders that if the contract were to succeed, other Middle East producers would use it.
The region supplies over 30 percent of the world’s oil but no exchange has previously established a successful contract linked to that market.
Dubai is a Gulf trade and tourism hub that is one of seven emirates comprising the United Arab Emirates. Most of the UAE’s 2.5 million bpd of crude output is produced in the emirate of Abu Dhabi.
Oman’s government-owned investment fund closed a deal to buy a 30 percent share in the DME earlier this week. Dubai’s state-owned Tatweer owns 32.5 percent, as does the NYMEX. DME floor members own the remaining five percent.
Additional reporting by Jonathan Leff and Maryelle Demongeot
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