In US, Europe and Middle East, crude oil benchmarks are traded on futures exchange such as West Texas Intermediate Crude on New York Mercantile Exchange (NYMEX), Brent Crude on InterContinental Exchange (ICE) and Oman Crude on Dubai Mercantile Exchange (DME). Surprisingly, Asia Pacific which is a booming oil market has no international crude oil futures exchange.
After abandoning the Asia Pacific Petroleum Index (APPI) pricing in 2010 and 2011, ASEAN (except for Indonesia) and Australia crude oil producers migrated to price their crude against Dated Brent which is derived from four North Sea crude (Brent, Fortis, Oseberg and Ekofisk). However, from the perspective of Asia Pacific crude market, Brent pricing doesn’t reflect the regional crude market fundamentals. Example: European refineries are increasingly being closed as they are not as competitive as the newer, bigger and more complex Asian refineries such as in Middle East, China and India.
Since the last few years, the regional oil industry players have been raising the issue of suitability of Brent pricing for regional crude. Discussions among the industry's players have started since 2013 to look for viable options. However, there was not much concerted effort to come up with the alternative solution.
As the biggest exporter of oil in the region, Malaysia could take on the leadership role to establish the crude oil futures exchange based on some of the Malaysian Crude Oil (MCO) benchmark such as Kikeh and Kimanis crude. Regional crude from Indonesia, Vietnam, Brunei and Australia and even the growing volumes of imported West African crude could also be traded based on the futures exchange. It will open up to a universe of new market such as pension funds, banks and even to the retail investors. As such, it will increase the asset value of the MCO as it is not purely valued from oil refining perspective. “Futures premium” will also increase the value of the exchange crude as experienced by the Omani crude in DME.
Futures exchange is regulated and transparent where the transacted price is considered credible and fair. Similar to the Omani crude oil Official Selling Price (OSP) which is derived from the monthly settlement price, there will be minimal complaints on the MCO OSP.
Due to the fluidity and speed of the oil market movement, it is always advisable and preferable to hedge close to when the physical deal is done. However, due to the time difference between Asia Pacific and London, this is not fully possible. As such, managing the exposure could be done more effectively in hedging exercise as it will be based on regional time instead of London time. Regional upstream players could also manage their activities risk exposure better by hedging against the futures exchange.
As the trading activities increase, it will spur the demand for crude tankage, shipping and other FDIs in refining and petrochemical. Inadvertently, this will also increase the development of the financial services and international brand awareness of Malaysia. As such, the futures exchange could help to transform Malaysia into a regional oil trading and storage hub inline with government initiative.
How to make this happen?
Dubai Mercantile Exchange which is based in Dubai has been in operation since 2007. It is a partnership of three core shareholders and several strategic partners. The three core shareholders are Chicago Mercantile Exchange (CME) Group (50%), Oman Investment Fund (29%) and Dubai Holding (9%). The balance of 12% is owned by various companies including Shell, Vitol, Morgan Stanley, JPMorgan Chase and Goldman Sachs. In other words, DME is a well established crude oil futures exchange in Middle East using Omani sour crude for delivery of DME contracts. Riding on the success of DME and in tapping their expertise in managing crude oil futures exchange, Malaysian entity(ies) could work with DME to establish a futures exchange for sweet crude oil to be based in Malaysia.
Malaysia always strive to achieve high income nation status via Knowledge-Economy. This could serve to be a successful model if it is well implemented and managed professionally. And this could also be the game changer to the crude oil market in Asia Pacific.
Malaysia always strive to achieve high income nation status via Knowledge-Economy. This could serve to be a successful model if it is well implemented and managed professionally. And this could also be the game changer to the crude oil market in Asia Pacific.
Aside from exploring for crude oil, building refineries and petrochemical plants, we should learn to connect the dots like our neighboring country which has no natural resources. We need to be bold to make that leap of faith.
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