This year has seen the UAE make headlines with a number of developments. In addition to its highly successful vaccine rollout, there was the launch of the ICE Futures Abu Dhabi (IFAD) exchange’s ‘Murban’ futures contract.
The contract – its launch coincided with the 50th anniversary of the founding of the UAE - is the first crude oil futures contract to be established in the Middle East since the Dubai Mercantile Exchanges commenced its Oman crude futures in 2007. Its launch on March 29th gave IFAD a couple of days to see trading take place before its use as the new pricing benchmark for ADNOC’s official selling prices in April.
As such, April was the first month a full trading cycle for the contract was completed, with market participants reviewing each and every movement. The market is keenly observing how the new futures contract will fit into the existing ecosystem of highly liquid hedging instruments, namely Dubai and Brent futures.
Impressive start
Figures for the first month of trading indicated that it got off to a strong start, with an average daily volume of 6,625 lots - equivalent to 6.625 million barrels a day. Open interest, which is the record of contracts that have yet to be settled, topped 41,000 lots, which is another strong number for the first month of trading.
In addition, there has been trading activity in forward months of the contract. This is typically a sign that risk management activity is being done as physical oil buyers and financial market participants look to hedge prices for future loading months.
The setting of the official selling price (OSP) for Murban by ADNOC, along with the removal of all destination restrictions for its crude grades, signaled a change in approach to its marketing. In the past, much of ADNOC’s Murban crude grade was limited to long-term contracts with refiners in Asia.
Marker for all
The change in OSP pricing means that each day the contract trades, it has a marker price that is of interest to those that trade not only Murban but also the other main Abu Dhabi crude export grades of Upper Zakum, Das Blend and Umm Lulu. The prices for these grades are now set as a differential to the Murban OSP.
As a result of the change in OSP pricing methodology, the broader oil market has started to value and trade all Abu Dhabi grades against benchmark Platts Dubai crude assessments, which are used directly or indirectly in the pricing of nearly all Middle East crudes as well as grades from Far East and Russia.
Murban futures averaged in April at $63.35/barrel, meaning that, for the first time, the price of Murban crude was not set by ADNOC, but was instead set at the market determined level for the grade. As April drew to a close, 5,110 contracts went to expiry on April 30, equivalent to 5.11 million barrels for physical delivery in June, according to ICE data.
Physical delivery
This means that during June, the Port of Fujairah will see over 5 million barrels of Murban crude physically delivered from the exchange onto tankers. These physical deliveries in June bring with them a new era in the way crude is traded in the Middle East as it will be the first time that an OPEC member, and one of its largest producers, moves away from selling its crude through long-term contracts with strict terms and conditions, and instead allows the physical lifting of its barrels purchased by members of a futures exchange.
With June just days away, the market will be waiting to see where those physically delivered barrels end up. Murban has a wide appetite across Asia and those who bought the barrels have the flexibility to optimize their end destination depending on the strongest market at the time of requirement.
As physical deliveries start to take place, futures trading for May will have concluded and the market will have another month of trading activity data to digest and review. This signals the importance that market participants place on the contract as it is used to price over 2.4 million barrels a day of crude.
