Major Players Back Murban Crude Futures Trading

Abu Dhabi has enlisted international oil companies, refiners and trading firms, including BP, JX Holdings and Vitol as partners in a new exchange that will trade the new Murban crude futures contract to be launched next year. The new exchange, ICE Futures Abu Dhabi (IFAD), is being launched by Intercontinental Exchange (ICE) to support a significant shift away from the traditional mechanism for pricing the emirate's oil (IOD Nov.5'19). ICE is the parent company of the New York Stock Exchange and also operates ICE Futures Europe, where the Brent crude futures contract is traded. The new IFAD exchange will provide a market for trading the world's first futures contract on Murban crude, which is produced by Abu Dhabi National Oil Co. (Adnoc). It will be located in the Abu Dhabi Global Market financial center. Once the ICE Murban futures contract starts trading, Murban crude will start to be priced on a forward-looking, market-driven basis, based on the futures contract, in a move intended to provide greater transparency. Adnoc currently uses a retroactive pricing system for its four crude grades, which has been unpopular because it creates uncertainty and risk for lifters, traders and buyers. That's because the official prices run two months behind those of most other Mideast producers and three months behind the spot market in which Abu Dhabi crudes trade. The Murban futures contract will create an alternative pricing benchmark to the Middle East's most commonly used yardstick, the Dubai/Oman benchmark which is operated by the Dubai Mercantile Exchange and traded on the Chicago Mercantile Exchange's electronic platform. The launch of the new contract has big ramifications for refiners in Asian countries that are among the largest importers of Mideast crude. Production of Murban is currently running at around 1.7 million barrels per day, according to Adnoc. "This contract will replace retroactive pricing with forward pricing allowing buyers to hedge their crude," Adnoc CEO Sultan al-Jaber told the Adipec conference in Abu Dhabi. The move will bring "significant benefits [and] help Abu Dhabi capture more value from every barrel we produce," while also putting the emirate at the center of the global market, he said. ICE Murban Futures will be a physically delivered contract with delivery at Fujairah in the United Arab Emirates on a f.o.b. basis. Adnoc pumps crude via its 1.5 million b/d Abu Dhabi crude oil pipeline to Fujairah, located on the UAE's Arabian Sea coast outside the narrow Strait of Hormuz shipping lane, from where it is exported. The decision to pursue benchmark status for Murban was taken by Abu Dhabi's Supreme Petroleum Council (SPC), the emirate's top decision-making body on oil and gas matters, earlier this month. The SPC also lifted destination restrictions on Adnoc's sales of Murban at the time. ICE said contracts traded on IFAD will -- subject to regulatory approval -- be cleared at ICE Clear Europe alongside ICE Brent, ICE West Texas Intermediate, ICE (Platts) Dubai and ICE Low Sulphur Gasoil. Both IFAD and ICE Clear Europe have sought regulatory approval from key jurisdictions and, once secured, expect to launch in the first half of 2020. Apart from Adnoc, BP, JX Holding and Vitol, the other partners backing IFAD are Royal Dutch Shell, Total, PTT, PetroChina, Inpex and GS Caltex. Bringing on board such industry heavyweights from the start will help boost liquidity and trading volumes, one source close to the matter said. "The partner companies could provide liquidity but who will trade it?" said Ehsan ul-Haq, lead analyst for oil research at Refinitiv in London. "I think in spite of the liquidity provided, it will be an uphill task" to establish Murban as a global benchmark, he added. There are other potential hurdles. With an API gravity of nearly 40° API and a sulfur content of 0.7%, Murban is both significantly lighter and sweeter than most Mideast crudes, raising questions about whether it could become a regional price benchmark capable of challenging established, heavier markers Dubai and Oman. "As far as Murban as a benchmark is concerned, it might be a marker for the Asian regional market -- Minas, Tapis, Australian grades, Espo [East Siberia-Pacific Ocean] -- selling at a premium/discount to Murban," said one oil analyst. "Better than Brent in the North Sea, which is too far from the Pacific market. But I don't see it as a Middle Eastern benchmark," the analyst added. Oliver Klaus, Abu Dhabi