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Maryam Salman
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The launch of ADNOC’s ICE Murban Futures Contract last month was a historic event for the emirate of Abu Dhabi, and for the UAE, as it became the first country to base all its crude official selling prices (OSPs) on an exchange that is not reflective of developments in the world’s hitherto dominant benchmarks, Brent and West Texas Intermediate (WTI).

ADNOC has made the critical decision of eliminating final destination restrictions; this means participants will now have the ability to freely resell the crude, setting Murban apart from regional peers who have sought to maintain control over flows of their grades.

The contract also enhances the overall efficiency of pricing, by doing away with the former retroactive process of pricing cargoes only after being loaded, based on readings of the international market. ADNOC has taken the elimination of destination restrictions a step further, by removing them for all its other grades as well.

The contract is forward-priced by two months and will trade on ICE Futures Abu Dhabi (IFAD) on a physically settled basis, giving traders more certainty over their purchase by reducing downside risk exposure. It has so far waited for significant lots to be traded, with over two-thirds of trade on the first day weighted toward the front of the six-month curve. Last year, ADNOC began setting prices one month ahead at a differential to Platts Dubai/Oman, due to the pandemic-induced crisis in the energy markets.

Starting from June, deliveries will be priced two months in advance, using freely-traded Murban as the reference. With the focus of global oil demand shifting to Asia in recent years, refiners there will be better placed to hedge using a close geographic and quality equivalent to their favoured imports, rather than rely on derivatives linked to Brent or Dubai.

Murban addresses many of the issues with older international benchmarks. In the region, DME Oman, traded on the Dubai Mercantile Exchange, has become an effective mechanism for buyers to obtain physical oil, with Saudi Aramco using it to price some of its exports. However trading levels on the DME are much lower than on ICE or CME for Brent and WTI. Gulf oil companies typically follow Saudi Aramco’s OSPs for pricing their grades, which are based on their own reading of market forces. Most grades are also shackled by destination restrictions, limiting the fungibility of onward trading to enhance liquidity and reach.

WTI, meanwhile, is priced at the inland site of Cushing, Oklahoma, and often fails to represent international market factors. It has also lost some comfort after plunging into negative territory last year at the height of the pandemic. Brent, on the other hand, has witnessed ongoing sharp declines in production of the North Sea crudes that underpin it. Despite the addition of new streams, the physical basis is less than 0.8 million barrels per day, and Norway’s giant new Johan Sverdrup field has been excluded for quality reasons.

Platts had earlier proposed a radical change to Dated Brent, used to measure the value of more than half the world’s traded crude, with the price assessment process switching to a CIF Rotterdam basis, rather than including loadings at terminals around the region. However, the proposal remains suspended for consultation after industry dismay, although one of the proposed changes includes integrating WTI Midland with Dated Brent.

Murban’s light and fairly sweet characteristics lends it well to rising Asian import demand, as a comparison to shale flows to Asia. For example, Occidental, Chevron, and Trafigura have already signed MoUs in recent months to price US crude exports to Asia off Murban, and many more could be on the way. The loading point at Fujairah on the UAE’s east coast avoids the costly and potentially risky transit through the Strait of Hormuz that most shipments from Kuwait, Iraq, Iran, Saudi Arabia and Qatar must make.

Underpinning hopes for its success is a 42 million barrels storage facility at Fujairah (in addition to ADNOC’s existing 8 million barrels), which can smooth exports if OPEC+ policy mandates continued curtailment of UAE production or there are any unexpected hiccups. With a rolling 12-month forecast of availability (which till March 2022 indicates an export stream of over 1 million barrels per day), Murban has a strong physical basis.

Murban could ultimately be the crude that plays the balancing act for the oil market of the future. It can offer greater choice to traders to manage trade portfolios and risk. However, whether other regional producers, especially Saudi Aramco, consider pricing their crude against Murban in a well-supplied market is speculative. Inter-regional politics, and differing crude characteristics with Murban (which is much lighter than the region’s typically heavier and sourer crudes), could limit viability in the short-term. There are also some concerns over the margins required for physical delivery.

IFAD partners BP, ENEOS, GS Caltex, INPEX, PetroChina, PTT, Shell, Total and Vitol are betting big on recent bullish sentiment in world markets to generate significant interest in the new contract. According to ICE, Murban is not intended to replace Brent or WTI, but rather to complement them with a range of derivatives to serve market needs, and enhance the world mechanism’s liquidity.

Stable production, earmarked for further expansion from the current 1.8 Mb/d, could help the contract reduce market monopolies by dominant producers and traders, while at the same time cementing its position as the ideal crude for the world’s light, sweet tooth. It remains to be seen whether Murban can achieve this either through steady evolution, or another sudden jolt to the market.

Maryam Salman is an independent oil market consultant.

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