Dubai futures volume surges on rising volatility, oil contango

Singapore — Trading volumes for benchmark Dubai crude futures -- the primary hedging tool for companies to manage their exposure to Middle East crude -- have surged in recent weeks as growing volatility in global oil markets increases the need for risk management.

The trading volume for benchmark Dubai crude futures hit a record high on the Intercontinental Exchange in February, and has since gained further momentum following Saudi Arabia's announcement of steep price cuts over the weekend that sent oil markets into a tailspin on Monday.

Volumes on Dubai first line futures on the Intercontinental Exchange hit a record 695,351 lots in February, surpassing the previous record of 616,310 lots in May 2017, an ICE spokeswoman said this week. February's volume was also up around 40% from 497,975 lots in January, ICE data showed.

"When I came in on Monday morning, there were already several millions of barrels of Dubai spreads traded on the screen," a Singapore-based trader with a Western trading firm said.

"Prior to this week, I believe the market was positioned long on Dubai spreads -- probably with some Brent spread shorts against them. I am pretty sure the market was anticipating some further cuts from OPEC+ -- which would have been sour crude -- so when the Saudis did the exact opposite, I think the market felt some pain on Dubai spreads," the trader added.

Traders said the volatility has attracted greater interest from financial institutions and hedge funds to trade Dubai futures -- made possible after the ICE in April 2019 transitioned Dubai Crude first line futures to the "legacy" market basket alongside Brent futures, opening the contract to a wider audience.

Total volume traded for all related Dubai derivatives in February -- including Dubai first line, Brent/Dubai Exchange of Futures for Swaps, Dated Brent versus Dubai futures and Dubai-related crack spreads -- also hit a record of 886,420 lots in February, surpassing the previous record of 744,081 lots in May 2017.

Besides the growing volatility, traders cited low flat prices and a contango market structure as contributing factors to rising Dubai volumes.

While low flat prices have lowered overall financial costs, a contango market structure -- where the price for prompt crude delivery is lower than for delivery in future -- has driven widespread storage in oil from companies hoping to selling it at a higher price in future.

Some of the storage demand has come from demand destruction caused by the spread of the coronavirus that has forced refiners to cut run rates and push oil into storage.

A growing volumes of oil going into storage is likely to continue to drive interest in Dubai futures as companies look to manage their storage dynamics by hedging risk on the forward curve.

The Dubai futures prompt M1/M2 intermonth spread slipped into contango for the first time in 2020 on February 7. The prompt intermonth spread was in a contango of 77 cents on Tuesday, the steepest in more than three years.

"People are generally more inclined to trade when it's in contango and plus crude is cheaper," a Singapore-based broker said. "If they have the storage to store the, oil they will hedge for sure."

Dubai futures are financially settled against Platts front-month cash Dubai crude assessments, which also form the basis for pricing of physical Middle East crude.