Ahmad Sharaf is an expert on futures trading in Dubai. He’s chairman of the Dubai Mercantile Exchange (DME), which has focused on crude oil futures since its inception. Sharaf is also CEO of Dutco Energy. He serves on Fuqua’s Middle East Regional Advisory Board. Sharaf earned his MBA from Fuqua’s Global Executive MBA program. Sharaf discusses the future of energy and the DME in the following Fuqua Q & A:
Q) The Dubai Mercantile Exchange was created in 2007. What is its importance when it comes to crude oil globally?
The production of oil in the Middle East historically was not represented through a futures contract, but through over-the-counter trading which has limited transparency. Futures oil trading provides a globally recognized platform for transparency and pricing. Risk managers can trade the contract with certainty in terms of price.
Today, DME is the leading energy focused commodities exchange in the Middle East and home to the sour crude oil benchmark, DME Oman. DME Oman is the largest physically delivered oil futures contract in the world and the only credible benchmark for oil trading for the Asian markets. This makes us relevant and important on the global stage, and our focus is on providing a fair and transparent means of pricing a regionally produced product for a global audience.
The East of Suez, specifically the fast-growing Asian and Indian markets, is a major source of the rising crude oil consumption that has been witnessed in recent years. Much of that demand is being met by the Middle Eastern producers. The Middle East-Asia corridor is the fastest growing oil supply/demand corridor in the world and the DME has a vital role to play by providing a fair means of oil price discovery and risk mitigation.
Q) The Exchange wants to attract more big oil producers. How will that be accomplished and what are the prospects?
As the DME Oman contract develops, and as the need for a crude oil benchmark that is relevant to the supply and demand economics of the Middle East and Asia becomes clearer, I am confident other oil producers will want to get involved with the DME. The conversations that have been taking place have been very productive in allowing oil producers to understand how the contract works and the potential growth. I believe this level of comfort will increase each year, putting them in a closer position to make a decision to fully adopt the contract.
From a performance perspective, an average of nearly 9 million barrels of oil have been traded on DME every day so far this year. That is equivalent to almost 10 times the underlying production of Oman. This year has been fantastic for the DME—volumes have grown 43% compared with the same period of 2013. This strong and consistent performance is also a significant advantage for DME in attracting big regional producers.
Q) The Exchange also wants to diversify. Why is this important?
Diversification into other products will help the Exchange to offer more contract options and expand revenues. The natural derivatives of the crude contract are other energy products.
We spend a considerable amount of time researching the region to understand which product is greatest in demand. Our next step is to build a contract around those products. For example, jet fuel makes sense because this is a large aviation hub. Likewise, fuel oil for tankers is another possibility since this is a trading hub. A diesel contract could also be in the works. We continue to invest resources around ensuring the crude contract is well established. Once this is in place, other products will be explored.
Q) Why is Dubai an important hub for talking about the business of energy?
Dubai is the commercial hub of the Middle East. Given its proximity and world class infrastructure, we have an area of more than two billion people to serve. Energy affects every business sector. Energy is the fuel for almost all enterprises that take place in this region. Having the Dubai International Financial Centre and the Dubai Financial Services Authority in place also puts Dubai in a unique position to host an organization like the DME.
Q) You began your career in Texas and worked in the oil industry there. How is the business of energy changing in the 21st Century both in the United States and abroad?
It has truly changed in the U.S.—with the advent of applying an old technology (hydraulic fracturing or fracking) in a more sophisticated and aggressive fashion. Fracking along with horizontal drilling has allowed the U.S. to leapfrog in terms of its energy sufficiency. They will become an exporter of energy in the near future. Everyone assumed this would create uncertainty in terms of oil price and the stability of the supply of oil, however this did not occur. What has resulted from the spike of U.S. energy production is an American manufacturing boost. Global oil prices stayed up.
Asia, a resilient eastern market—while not at its peak as in 2007—still shows strong demand.
We have seen some uncertainty in terms of supply from various parts of the Middle East due to geopolitical events, but the price remains more than $85 per barrel. The cost of production in the U.S. is approximately $75 per barrel allowing regional prices to stay buoyant, since we see a similar range of costs for the eastern side of production.
Because markets now seem somewhat independent, the DME as a pricing hub can truly price according to the environment in which it operates. The market would expect to see less disturbances in prices in the Middle East as a result of events happening on the other side of the world.