* Saudi could switch to DME as oil marker as soon as 2010
* Feedback-gathering talks with Asian lifters intensifies
* Nagging fears over liquidity, predominance of big players
By Judy Hua and Luke Pachymuthu
SINGAPORE/DUBAI, Nov 20 (Reuters) - Saudi Arabia is all but certain to adopt the Dubai Mercantile Exchange's (DME) Oman crude oil futures contract as its benchmark one day, oil traders say. Now the main question is when, not if, it makes the switch.
The growing confidence that state exporter Saudi Aramco will eventually abandon the Dubai/Oman crude assessment price as its basis for Asian exports is bolstered by two things: the tone of recent discussion between Aramco and its customers; and its abrupt switch to a Gulf sour crude benchmark for all U.S. sales.
But because of nagging concerns -- including the relative illiquidity of the DME market, the large share of production held by a single company and the lack of substitutability -- traders appear undecided about when such a transition would occur.
In a Reuters straw poll of 12 traders and refiners, who represent about a tenth of Saudi crude shipments to Asia, two said they expect the kingdom to make the change next year, one said 2011, and four said it could happen around 2012.
The rest declined to give a definite answer on timing, but nine of the 12 agreed that Aramco would likely change the way that nearly half of Asia's crude oil is priced, addressing years of concern over dwindling liquidity in the existing Dubai marker and allowing refiners to hedge their exposure on an exchange.
"I will say next year or never. There is a limit to how long you can give the patient mouth-to-mouth," said one trader.
A Saudi move to price off the DME -- which would almost certainly be followed by Kuwait, Iraq and Iran -- would likely make it the benchmark for some 12 million barrels per day (bpd) of Gulf crude exported to Asia, where China and India are set to take a much larger share of future world oil demand. About half of Saudi oil exports are shipped to Asia and this is set to rise.
It would also provide a much-needed liquidity boost for the DME, which has struggled to expand activity beyond a handful of traders, producers and refiners who mainly use the market as a way to sell or procure physical supply, not to hedge.
The kingdom has been seeking feedback from its customers on the DME since the middle of 2008, discussions intensified early this month at the annual Asia Pacific Petroleum Conference (APPEC), as well as during follow-up meetings with at least one major refiner in the region, multiple sources told Reuters.
They began sounding out Asian customers almost a year before they started discussions with U.S. buyers about dropping the U.S. light sweet crude benchmark, which had become increasingly volatile, particularly at the front end of the curve.
Last month it dropped WTI for the Argus sour crude index, the first major change in its global benchmarks since it abandoned Europe's Dated Brent nearly a decade ago, and raising expectations the kingdom may be ready for a change in the East.
But the fact that Aramco appears to be taking a more measured approach with its traditionally more conservative Asian customers suggests, for some, that a change isn't imminent, and is unlikely to be included in 2010 contracts now being negotiated.
"If Saudi did make the change, it would not be until after 2010," said one trader with a north Asian refiner.
Another said he was told by a Saudi official during a meeting at APPEC that if a suitable alternative is available, Aramco will consider it, but the Saudis did not see anything definite now.
For a table of Saudi term sales to Asia click:
BUYERS TO LEAD?
Saudi Arabia set up a special division in 2008 to study the possibilities of changing the marker, but is working to ensure it has the full support of buyers, many of whom are unconvinced the DME offers a clearly superior alternative to the existing system.
DME Oman is now the benchmark for Dubai and Oman crudes. Platts' Dubai and Oman assessments -- based on over-the-counter bids, offers and traders in a half-hour period -- are used in pricing formulas by most Gulf producers, including Saudi Arabia.
"You can't do something with the end user ending up as losers," said John Vautrain, Senior Vice President of Purvin & Gertz Inc. "The judge is the buyer of Saudi crude."
The DME launched its Oman contract in 2007, marketing it as the first Middle East sour crude futures to have the backing of local governments -- both Oman and Dubai are shareholders -- and offer physical cargo deliveries.
DME trade volumes had hit a record of 8,076 lots on June 23 after Dubai said it would set the official selling price of its benchmark crude in relation to Oman oil futures. Daily volumes have fallen to between 1,000 and 3,000 lots over the past months.
Volumes have hit a record daily average of 2,624 lots for October. DME aims for more than 10,000 lots daily, still pale in contrast with NYMEX's daily average of over half a million lots.
But compared with existing Platts benchmark, DME already enjoys higher volumes and is more transparent, traders say.
LIQUIDITY
Unlike the CME-owned New York Mercantile Exchange and Intercontinental Exchange (ICE), most traders use the DME as a means to trade physical supply, limiting liquidity.
"This is the problem DME is facing: achieve the critical mass of liquidity so that they can have an attractive index," said Vautrain. "What they need probably is financial players."
Chief executive Thomas Leaver told Reuters this month the DME wanted to woo more financial firms, after big banks and traders such as Goldman Sachs, Morgan Stanley, Vitol and Royal Dutch Shell became strategic investors last year.
Traders say to avoid price distortions, DME needs to allow alternative grades to deliver other than Oman. But Leaver has asserted that Oman will remain the linchpin crude.
The emergence of more major players in Oman crude trades in recent months could also help promote DME as a benchmark, easing worries over Shell's predominance of physical Oman supplies that have kept the Saudis and lifters away from the exchange.
Shell is the top private equity holder with a 34 percent stake in Petroleum Development Oman, which produces most of the grade. "Shell's position looks too big in DME," said a trader.
Shell declined to comment on the matter.
However, Unipec, the biggest buyer of Oman in total via term contracts, spot market and off the DME, is now also an important seller on the exchange.
And Norwegian oil giant StatoilHydro recently became the top lifter of Oman crude off the DME, adding to the list of influential players and can be viewed as a boost to promoting the DME as a benchmark, traders said.
In the end, it's the eternal chicken-and-egg debate: the Saudis want a more liquid exchange before changing their pricing, but only a change in pricing will increase liquidity.
"I think Saudis want to see more volumes go through DME... but I think it is silly because DME volumes are far far higher than Platts window volumes, so price discovery on DME is much better," said another Western trader.
"I don't think DME is perfect, far from it... but it's the best we have at the moment." (Additional reporting by James Topham in TOKYO, Jonathan Leff in SINGAPORE, Tamara Walid and Simon Webb in DUBAI; Editing by Ramthan Hussain)