Financing Oil is critical

The DME already has primarily European and American banks financing its Omani Crude Futures; banks such as JP Morgan, Morgan Stanley and BNP Paribas, as well as the newly added Royal Bank of Scotland (RBS), but there are currently no Middle East or Asian banks in the mix.

“We want Arab banks to start financing Arab oil,” said Christopher Fix, CEO of Dubai Mercantile Exchange. “We are very interested in getting Middle Eastern banks to participate in the DME, because in the $1 billion to $1.5 billion a month that is being financed on the DME, none of it is being financed by Middle Eastern banks and very little of it by the Asian banks.”

With the current economic difficulties facing various countries in Europe, and the US as a whole, Fix says that the Middle East is an emerging financial force that could be better utilised within the crude financing space.

“If you think of the development of the industry and the business, it is all basically coming from the Gulf, heading East, and this is where the financial institutions in the Gulf have an opportunity. If they start financing their own crude oil they will establish themselves as a major industry player and this is what we are encouraging,” said Fix.

DME is also planning to look at Islamic finance and how that too can play a role on the DME.
“Islamic financing is an exciting frontier and this is something we are trying to develop in terms of local and regional Arab banks. We are examining Islamic financing structures, which is exciting for us,” said Fix.

Arab banks are currently not financing Arab oil because financing is a completely new area for them, according to DME.

“When you examine trade finance, the expertise you need to monitor the positions, to look at the bills of lading, to understand the physical requirements of getting ships in place and having insurance and the costs looked after, it is very intensive work and that skill set is something that has yet to make its way to the Middle East.

My view is that this is a great opportunity to build a sustainable business segment in the Middle East that will provide jobs and also build around the expertise that is already here,” said Fix. “Financing is the industry of the future and we want to encourage that.”

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DME as a financing platform
Companies that are using DME as a financing platform have the benefit of knowing exactly what the price of Omani crude is.

“Customers can come and see the futures exchange, traded price for the months that are following and know exactly how much they have at stake with regard to financing Omani Crude cargos. We deliver crude oil from the exchange as part of the Omani programme and we deliver about 13 to 15 million barrels a month and that is all priced.

The entire crude programme for the sultanate of Oman is priced here at the DME, we have our settlement window which is between 12:25 and 12:30 every business day and then the state of Oman, the minister of Oil and Gas takes that price to use to sell the oil,” said Fix.

In terms of financing the settlement window makes it very easy financeable commodity product because the banks and the trading houses know exactly what the price is going to be and that is the delivered price of crude at Mina al Fahal, allowing them flexibility and certainty about how they can finance that crude according to DME.

“Given that we are doing about 13 million to 25 million barrels a month and oil is trading at around $100 to $110, that is between $1 billion and $1.5 billion of financing required every month, so it is the largest physical delivery exchange in the world,” said Fix.

For DME customers, who are the largest trading houses, state owned oil companies from China, and some 70 different participants trading in the exchange, they have the ability to source the financing against the certainty of the delivery at a price that is discovered and everyone knows exactly the types of monies that they are dealing with and that makes it easy for the banks to finance DME, says the company.

Benefits of financing to banks
According to DME, one of the major benefits of financing to banks is that when a bank is financing a commodity, it needs to make sure it knows what the commodity specifications are, this is clearly a problem if the bank is financing something in a warehouse and it can not see what that is.

“With DME, the banks know that every month they are getting blended Omani crude oil and they know what those specifications are, plus they have the certainty over the operational issue being tested very, very robustly. We have delivered over 700 million barrels of oil through the exchange mechanism; this has a long track record of operational success.

From a financing perspective you want to make sure that when the boat shows up you are going to get the oil and you want to know exactly what kind of oil you are going to get, so those things are very well understood by the market,” said Fix.

Another benefit of the Dubai Mercantile Exchange is that the banks can protect themselves against adverse moves, or customer credit default.

“A problem that any bank has when dealing with financing is that they are concerned that potentially their customer will disappear and they will be left with the commodity. Banks tend not to want to be in the business of holding and storing commodities.

The beauty of the DME is that if they ever did find themselves in that situation they could sell the crude back to the exchange, by taking the futures position and reverse it, or even sell it in the market. Then the loss will not be the full notional value of the cargo,” said Fix.

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Why is financing important?
Financing is the wheel that turns the oil business, according to DME; even large businesses cannot afford to finance millions of barrels of crude.

“When you are talking about $200 million per cargo of oil; two million barrels times $100, which is a large amount of money to commit to a financing cycle. Without the financial institutions, the business just can not operate.

Even the large companies who are well capitalised are going to make use of their financing sources to be able to run their business and particularly now when we see such strong growth in the East of Suez market,” said Fix.

A lot of the large Geneva trading houses, and large oil players are only restricted by their financing, according to DME, they have plenty of customers, but not the ability to source the crude themselves because they need the banks to come in and help them provide the cash liquidities so that they can buy and then turn around and sell.

“This is a really exciting time for the Middle East and Suez market and financing is critical to it. Not just DME, but the whole sector. What we are seeing with the development of Fujairah and the pipelines and refineries, is that there is a whole ecosystem that is developing in the Middle East, a trading system,” said Fix.

According to DME, Dubai is really becoming a centre of trading and without the financing piece of the puzzle, which is there to build the refineries and the pipelines, then that piece of the system breaks down.

“Financing is critical to lubricate the wheels of the trading system that are developing and also directly to expand the platform for the oil & gas industry,” said Fix.

How is DME encouraging financing?
At the moment DME has several large banks that are clearing members of the exchange and those and other financial institutions have customers who like using the DME because of the fact that there is crude oil delivery at the end of the contract.

“It is not like a paper trade where you punt on the price of oil, you actually have a physical delivery. We are increasing the number of financial institutions who participate on the exchange and this allows our customers to get easier access to financing and continue their trade flows.

We are talking to the market and bringing in more clients who go to banks and ask if they can work with us to finance those oil deliveries and that is happening month in month out,” said Fix.