Murban crude oil futures are coming: Are they needed?
The pricing of Middle East crude oil is poised for another shakeup, with Abu Dhabi seeking to establish a futures contract for its Murban grade that flows at 1.6 million barrels per day. State-owned Abu Dhabi National Oil Co. (Adnoc) has chosen Intercontinental Exchange (ICE), the operators of the global benchmark Brent futures, for its new contract, slated to be launched in the first half of next year, S&P Global Platts reported earlier this month. On the surface this seems like a very good idea as it would ditch the current retroactive pricing system used by Adnoc, and create a potentially useful benchmark for light crude in the Middle East.
A move to a more transparent pricing system may be popular with Asian refiners, the main customers for Murban, as it would mean they would know what they are paying in advance, rather than waiting for about two months to find out the price of oil they have already received.
In theory, pricing Murban on a futures market will also hold benefits for Adnoc, as buyers may become more keen on the grade if they can be assured there is a liquid and transparent market with numerous participants.
However, while a move to a futures contract looks like a sound strategy, in the real world things seldom work as intended and Adnoc and ICE face numerous challenges.
The major one will be to convince market participants that a new crude benchmark is actually needed. Brent and West Texas Intermediate (WTI) are well established global benchmarks for light crudes.
Murban has a similar API gravity to both Brent and WTI, begging the question as to why anybody other than an actual physical crude buyer would want to trade futures in Murban, rather than the existing light crude benchmarks.
To be sure, there is always the opportunity for arbitrage between crude contracts, but for this to work market participants would have to be convinced that a Murban contract was deep and liquid enough to allow them to enter and exit positions with ease.
It would also have to be seen as freelytraded, in other words any Murban contract couldn’t be dominated by just a handful of big players, who may have the market power to move prices by virtue of taking large positions. To put matters in perspective, the average daily volume of Brent contracts traded is about 920,000, according to data on ICE’s website. The existing Dubai Mercantile Exchange (DME) contract for Oman crude futures typically trades about 5,000 lots per day.
The DME contract was launched in 2007 and is well regarded in the market as providing a deliverable futures contract for a Middle East crude grade.
It was adopted by Saudi Aramco as part of their pricing system last year, with the world’s largest crude exporter using both the DME Oman contract and S&P Global Platts assessments of the price of Dubai crude.
Despite these successes the DME contract hasn’t reached anywhere near the volumes of Brent, even though it is arguably a better benchmark for the Middle East as Oman, a medium sour grade, is closer in gravity and sulfur to more of the region’s crudes than is Murban.
Any new Murban contract is going to face the same challenges as the DME’s Oman futures, namely how to gain traction in an already crowded market.
It can be expected the contract will be properly designed and administered, given the involvement of ICE, on the other hand there may be some sort of conflict in ICE having both Brent and Murban contracts under the same roof.
No doubt the argument would be that the two contracts will complement each other, and they may well open up arbitrage opportunities, but the main question remains whether Murban futures will attract sufficient volumes. Adnoc wouldn’t necessarily have to use a futures contract for its own official prices. The company could also get rid of the retroactive pricing system and move to a more forwardlooking official selling price mechanism similar to the Saudis and other regional producers.
This would allow Murban to be priced against existing, liquid benchmarks, removing the risk of launching a new contract.
If it does work, a Murban contract may well boost the appeal of the grade and deliver a better pricing method than the current unloved retroactive model.
But the major challenge will be attracting liquidity and a large variety of participants, otherwise refining customers and traders will be reluctant to use the new contract out of fear it will be too volatile.