Abu Dhabi makes bid to create new global oil benchmark

Abu Dhabi started trading futures contracts for Murban crude, its biggest oil grade, in a bid to create a benchmark for the energy market.

The aim is “to make sure that Murban is a globally freely traded commodity and allows everybody around the world to use it either for pricing or hedging their risk,” Khaled Salmeen, executive director of supply and trading at government-run Abu Dhabi National Oil Co. (ADNOC), said in an interview with Bloomberg Television. “It provides an additional tool that the market has been looking for.”

ADNOC began trading Murban futures on an Abu Dhabi exchange on Monday, marking the first time a Gulf OPEC member has allowed its oil to be freely sold and shipped anywhere in the world. Atlanta-based Intercontinental Exchange is operating the platform known as ICE Futures Abu Dhabi.

Establishing a benchmark isn’t immediate as traders want to see a sufficient volume of deals over time that lead to prices investors deem fair. Creating a forward curve, or bids and asks for crude in future months, will also be a key test for the new Murban exchange.

On its first day of trading, volume in Murban for June, the first month for which cargoes will be available, was 2,163 transactions, as well as more than 1,000 for July and several hundred for August and September. The contract for June delivery traded at $62.23 a barrel as of 1pm in Abu Dhabi.

Trading on its first day has “been a real success so far,” Stuart Williams, president of ICE Futures Europe, said in a Bloomberg Television interview. “We have greater aspirations for this contract,” Williams said of the ambition to establish Murban as a regional benchmark.

Once trading volumes and liquidity are established, ICE and ADNOC will seek to advance talks with other national oil companies in the region about adopting Murban futures as a pricing reference for their sales.

The region’s main producers, including Saudi Arabia, Iraq and the United Arab Emirates, of which Abu Dhabi is the capital, tend to stop buyers from reselling their oil. They also use benchmarks from outside the Middle East to price much of their crude.

In attempting to make its mark, Murban faces competition for regional benchmark status. S&P Global Platts publishes widely used price assessments for Dubai oil and the Dubai Mercantile Exchange trades futures for Omani crude. Both act as benchmarks for Middle Eastern shipments to Asia.

What’s more, oil traders dislike change, especially when they believe markets already do a good job matching supply and demand. Platts backed away from plans to revamp its Dated Brent contract after comments from traders earlier this year.

ADNOC can produce about 2 million barrels of Murban crude a day and has pledged to guarantee at least 1 million barrels of daily exports to support trading on the exchange.

The UAE is the third-largest producer in the Organization of Petroleum Exporting Counties, which cut supplies last year as the pandemic crushed energy demand.

ADNOC has more than 60 customers in about 30 countries, which will help support demand for Murban and ensure no buyer can exert undue influence on the market, Salmeen said.

OPEC+, a broader group including countries like Russia, meets this week to discuss whether to further ease the production cuts that began last May. Those supply curbs and the rollout of vaccines have caused the established global benchmark, Brent crude, to surge roughly 65 per cent since the start of November to about $63.50 a barrel.

Still, the rally has faded this month amid a new wave of virus cases, which may push some members of the producer group to argue that the cartel can’t raise output just yet.

Price levels in the range of $60 a barrel are “a sustainable average,” Salmeen said.

Last week’s closing of the Suez Canal after the Ever Given container ship ran aground won’t cause major issues for oil markets, he said. Markets are well supplied and buyers can draw from high inventories to avoid any shortages, he said.