Oman oil futures trade picks up; Shell fillip?

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SINGAPORE, Oct 3 (Reuters) Oman crude oil futures trade has picked up this week with at least one new player joining the fray, and some traders say Shell's buying spree on the Middle East crude market last month may be part of the cause.

A total 2,595 lots of Oman traded on the Dubai Mercantile Exchange (DME) on Tuesday, the sixth highest daily volume recorded since the DME opened on June 1. The DME is part owned by the New York Mercantile Exchange Trading during Asian market hours has also picked up since the beginning of September, indicating more locally based players versus the London- and New York-based trading that appeared to dominate in the first months after its launch in June.

And one of Japan's trading houses began dealing on the exchange for the first time this week, a source said, adding the decision was not influenced by Shell's trading activities.

Interest from other firms has also picked up, the source said.

''We see that liquidity has now developed,'' said a trader with a company active on the DME. ''It might not have been intentional, but the Shell thing seems to have had an effect.'' An unprecedented buying spree by Royal Dutch Shell -- which scooped up more than 400 partial cargoes or more than 10 million barrels of over-the-counter Oman and Dubai crudes -- has refocused attention on the price discovery mechanism used as the benchmark for over 12 million barrels a day of Middle East crude.

While many refiners blame Shell more than the pricing system run by assessor Platts, a unit of the McGraw-Hill Cos, for the higher costs of crude, a number of market participants say the binge has prompted refiners to take a harder look at the DME for higher liquidity to set the price of Middle East crude.

Shell's activity last month, which coincided with tighter market conditions due to major maintenance in Abu Dhabi, left the Platts Dubai average at .36 a barrel, just 20 cents below the Oman average, raising the cost of crude for refiners.

Saudi Arabia, the world's biggest exporter and a weathervane for Arab producers' oil benchmarks, switched to using an average of Brent futures in 2000 after a series of trading plays warped the value of physical Dated Brent, the previous marker.

Industry sources say a switch from the current Platts Oman/Dubai benchmark would require proven liquidity in the DME contract, which in turn needs the support of Asian refiners who to date have been reluctant to trade.

Officials at the DME declined to comment on the identity or number of companies joining the exchange this month but said interest was growing.

''We continue to receive feedback from our customers that more and more of them are entering the market,'' DME chief executive Gary King told Reuters.

While open interest has expanded to several hundred lots in the second and third-month contracts, front-month interest into expiry was steady last month at 4,000 contracts, indicating a physical delivery of 4 million barrels of Oman.

SHELL DOMINANT But some traders saw a negative side from Shell's high-profile splurge on the market last month, fearing it might draw attention to the major's big share of Oman production -- a long-standing objection from some traders to using Oman as the primary benchmark.

Shell holds a 34 percent equity in Petroleum Development Oman (PDO), which produces some 90 percent of all Oman crude.

Refiners hedge their refining margins against Dubai traditionally and any switch from Platts to the DME would require them to switch from Dubai to new Oman cracks.

This has limited interest in the DME for their clients.

''As long as hedging is against Dubai, we will have limited demand to trade on the DME,'' a trader with a bank said.

In the meantime, rival InterContinentalExchange's (ICE) rival Middle East contract, settled against Platts Dubai assessments, has seen interest dwindle further, with no trade done on several days in September, and total open interest having fallen below 1,000.

REUTERS PBB RS1740

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