Will Murban succeed as a benchmark?
Abu Dhabi National Oil Company (ADNOC) wants to open a futures market for “Murban” crude oil next year.
ADNOC produces about 1.7 million bpd as its main and most abundant crude grade produced from onshore fields.
ADNOC will begin trading futures contracts of its flagship oil grade in what could eventually become a new price benchmark.
This is supposed to be done on an independent stock exchange. Seemingly, the goal of this mechanism is to make “Murban” crude oil a benchmark just like Brent (ICE) and WTI (NYMEX).
The “Murban” crude forward pricing mechanism will enable Asian customers and market participants to better price, trade, and manage their crude requirements. It would also give Asian refiners a more suitable tool to hedge their sour crude oil price exposure.
An ongoing question: How can “Murban” futures succeed as a benchmark?
Though not yet announced, the plan is for a sizable portion of the currently produced “Murban” crude oil to be freely traded as futures contracts on an internationally recognized exchange. It is not yet clear if it will be a suitable tool to hedge the Arabian Gulf sour crude exposure, as Asian refiners need to hedge their sour crude grades from Arabian Gulf.
Asian refiners currently struggle to have a proper hedging tool. Their “basis risk” is large as the quality of Arabian Gulf sour crude grades differ from Brent and WTI, let alone these grades being very different from “Murban” itself.
It is expected that “Murban” has a much greater chance of success unlike previous attempts to launch a sour crude futures contract on DME.
Faisal Faeq
In terms of quality, Murban is one of the best representative of the other sour crude grades from the Arabian Gulf and very close in specifications to the Saudi Arabian Extra Light crude oil (AXL).
It is expected that Murban crude oil be will be traded significantly in the physical spot market. Hence, it would be ideal to be used as a hedging mechanisms. ADNOC will also have to tell market participants about its delivery point.
Sufficient liquidity will also ensure the success of this new benchmark. This begs the question: How many spot barrels will Adnoc give for delivery purposes?
From a historical point of view, the industry has rejected Oman as a benchmark, so Dubai Mercantile Exchange (DME) invented the “partials”, i.e. contracts of small volume. “Partials” are 25,000 barrel contracts, substantially smaller than the full 750,000 barrels minimum cargoes traded in the physical market. Thus 30 partials are required to create a minimum physical shipment of an AFRAMAX tanker that can load 750,000 barrels.
Partials are used today to hedge the price exposure but they are imperfect. It is worth noting that the volume on the DME is still small compared to ICE or NYMEX.
To be a benchmark, Murban needs to be liquid, have transparent transactions with abundant volumes and also be reliable. It is strongly believed that all of these criteria are perfectly met by “Murban” crude oil. Being abundant could also help the crude to be “reliable”, i.e. it will be constantly produced and its quality will not change in time.
For instance Oman crude, with an average production of about 875,000 bpd, was rejected by the market because it is mostly controlled by the government and another major oil company.
“Urals” the Russian crude oil was also rejected by the market as a benchmark. All robust benchmarks have liquid financial markets behind them. Oman crude oil has a large physical delivery, but not much of a forward market, which is key in determining how to price Arabian Gulf crude grades.
Therefore, the UAE would be wise to avoid becoming another version of either Oman crude or Urals crude.
It is expected that “Murban” has a much greater chance of success unlike previous attempts to launch a sour crude futures contract on DME.
If successful, Murban will likely become the benchmark for around 15 million bpd of Arabian Gulf crude daily exported to Asia. Murban can scale up fast once Arabian Gulf producers commit to price their crude using it as a benchmark for their sour crude grades.
• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco.
Twitter: @faisalfaeq
