Murban is the flagship crude in the ADNOC pipeline. Listing of Murban contracts on ICE Futures Abu Dhabi is set for March 29. Image Credit: Supplied

Major reforms undertaken by one of the Middle East’s largest oil producers is set to substantially loosen state controls in the region’s oil markets - and driving it one step closer to a free market system.

Abu Dhabi National Oil Co. (ADNOC) is partnering Intercontinental Exchange in listing a physically delivered futures contract for its flagship Murban crude, thus being only the second Middle East producer to do so after Oman more than a decade ago.

Equally important, ADNOC abolished destination-restrictions for all its crude oil exports, key controls that Middle East producers use to manage their market shares in key consuming regions of the world.

Combined, these mean that not only would market forces determine the price of a key grade of Middle Eastern oil, they would also determine where oil from the region’s third-largest producer goes to.

Sets benchmark

ADNOC’s move is significant for crude producers and consumers across the region. Greater market participation in the price discovery and flows of Murban will further strengthen the existing mechanism used to price millions of barrels of oil.

For four decades, the benchmark Dubai, published by S&P Global Platts, provided the definitive market-determined price of crude oil loading from the Middle East that’s free from any restrictions on destination or resale. Each day, bids, offers and trades submitted by a wide spectrum of buyers and sellers in the market enable a transparent assessment process that underpins the Platts Dubai assessment.

Over the years, as production of UAE’s Dubai crude declined, the Platts Dubai benchmark saw addition of alternative delivery of oil to cater to growing liquidity in the market. Similar to Platts Dated Brent, the world’s predominant oil benchmark, Platts Dubai evolved to reflect a basket of oil grades of diverse qualities, loading from different locations in the Middle East.

Pricing play

Currently, the Dubai basket comprises Dubai, Upper Zakum, Murban, Oman and Al Shaheen grades—from the UAE, Oman and Qatar. The most competitively priced crude within this basket sets the benchmark Dubai price each day.

This diversity in oil quality and location has ensured the benchmark used in the pricing or hedging of most Middle East oil exports to Asia is protected from the risk of major disruption in supply-demand for any particular oil grade or at any specific delivery point.

Millions of barrels of oil flowing into Asia from the Middle East and Far East price basis Platts Dubai. A deep and mature Dubai derivatives market, with a web of contracts linking it to the Brent complex, help companies manage their exposure to oil prices and allow refiners to lock in their margins. Billions of barrels of Dubai futures contract are traded each year on multiple exchanges and over-the-counter markets. A robust ecosystem for pricing and hedging Middle East oil exists around benchmark Dubai today.

Evolves it further

Incremental changes in the Asian markets, such as the launch of Dubai Mercantile Exchange’s Oman contract more than a decade ago and Shanghai Future Exchange’s crude contract more recently, have further helped in the evolution of this pricing mechanism.

The launch of Murban crude futures by ICE Futures Abu Dhabi (IFAD) is widely seen as complementary to this established ecosystem that centers around Dubai, and expected to inject further liquidity and transparency into it.

Given that Platts Dubai reflects only destination-free oil, the lifting of restrictions on Murban and Upper Zakum means the entire supply of the five Dubai basket grades is now available for the benchmark’s price assessment process.

Alongside Brent/Dubai, an active Murban/Dubai market in future could become crucial in determining arbitrage flows of oil globally. When it begins trading on March 29, the IFAD Murban could face the same hurdles that any new futures contract comes across.

While success is not guaranteed, the reforms announced by ADNOC ahead of its launch will likely benefit the oil markets in the long run.