The Crude Report: Counting down to Murban futures

Author Argus

The highly-anticipated IFAD Murban futures contract will be launching next week, on Monday, 29 March 2021.

In this episode of The Crude Report, Argus vice presidents Alejandro Barbajosa and Karl Kleemeier discuss what IFAD has learned from the similar DME Oman launch, how IFAD Murban is expected to impact global benchmarking and how the contract might deal with further Opec+ production cuts.



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Transcript

Alejandro: Hello and welcome to The Crude Report, a podcast series on global crude oil markets by Argus Media. My name is Alejandro Barbajosa, VP for crude in Asia Pacific. And today, I have Karl Kleemeier, who leads our crude coverage in the Middle East. Karl, welcome.

Karl: Thanks for having me, Alejandro.

Alejandro: Given your experience in crude, why would you say the market is so excited about the launch of the Murban futures contract if the DME Oman futures contract, which was introduced more than a decade ago, has taken so long to gain some traction?

Karl: Well, it's a really good question. You know, the Asian market has had, you know, one dominant benchmark for a number of years, and relative to the West, some of the markets in the West, has had relatively low transparency in their spot market. So, really, this has led to, kind of, a desire in the market for other benchmarks.

And especially at the light end of the barrel, there's been very weak price discovery at the light end of the barrel in Asia, and also, the light end of the barrel is kind of the sweet spot for futures contracts. You know, lighter crude could go into more refineries, so there's more ultimate demand. Just about any refinery can take a light, sweet crude. It's maybe not always their most efficient crude, but they can take it at the right price. So that works well for futures contracts because it creates the most potential demand. And so that's really, kind of, the why on the IFAD contract, people are looking to that saying, "Hey, this has got a lot of potential liquidity."

You mentioned the DME Oman contract, and that's actually done well. And there's a perception that maybe it hasn't so much. But I can't remember the statistic, but it's something like 95pc of all futures contracts never trade, the ones that are floated. And the DME contract has succeeded on that front, they have quite a bit of trade in the front month, a little less so on the curve. But, you know, they've succeeded in the contract's viable, it trades in good volumes, and there's very good price discovery. So from that point of view, it's done very well. And there's no reason to believe that the IFAD Murban contract won't do similarly.

Alejandro: You talked about how central, just one benchmark in this case, Dubai has been to the Middle East crude market for decades. Would you expect Murban to topple the incumbent Dubai benchmark in terms of acceptance and adoption by producers and refiners across Asia?

Karl: Not immediately. Old habits die hard, you know, and that's true in any market. Market participants, they don't want to change all the numbers in their contract, the names, you know, and with no immediate need, there's nothing urgently suggesting that "Oh, we need to change our marker."

To the extent though that it provides another option in the market, slightly different grade, it's going to be something that's out there. Any new point of price discovery is always a good thing, and it provides an option should that become necessary or desirable. You know, as far as the development of it as a regional benchmark, really a development of a futures curve will really be key. If they can get not just the prompt month for physical delivery, but get an M2, M3, curve some trade out there, that's going to provide some of the tools, you know, market participants, refiners, producers need to start using it more often and it could potentially become a price marker at some point. But as mentioned, inertia is huge and change can be difficult.

Alejandro: Well, you mentioned liquidity down the curve, but, you know, for many contracts or for many benchmarks, illiquidity is also an issue right at the front, right? When they're calculating the spot price. It seems to be a vanishing feature, particularly if you look at the North Sea and the daily calculation of Dated Brent. Would you expect Murban to have pricing implications beyond the Middle East as participants in the Atlantic basin and Asia Pacific look for more sustainable pricing mechanisms?

Karl: Potentially. Major benchmark production, you know, has been lower in all the major trading centers. Over the years, deals decline, you know, WTI production has trickled downward, Brent production for sure, Dubai, you know, over the years went from being the most liquid traded grade, you know, to relatively small production. And various measures have been taken over the years to make sure there was plentiful volume. At one time, the Nymex, the granddaddy of the contracts, you know, added in other deliverable grades when the US was an import center and you could deliver Brent and several other grades at various quality premium.

Now that it's an export center, they've kind of redefined deliverable based on, you know, a number of quality statistics. So there were a number of different streams that can be fed in and deliverable against the WTI contract. For Brent, they've added other grades as deliverable of the dated Brent, which has helped beef up that marker. Dubai, the same, other grades have been stacked in to add volume and to avoid the dreaded squeeze on a marker that can affect its reliability as a price discovery mechanism.

So ultimately, these markers all reflect their local fundamentals, though. Cushing has, you know, storage issues, you know, or had, you know, with pipeline takeaway issues, those resolve themselves over time. North Sea has had, you know, local demand, different fields decline, and also crippling out of the region has affected their price discovery, you know, shale oil in the US. So all of these things affect these pricing mechanisms. And, you know, the advent of more or less oil definitely has an effect. But with Asia being a net import market, certainly, prices could well move to reflect that arbitrage. And to the effect that you have grades moving regularly into Asia, that certainly could have become a prime demand point. And, you know, if it becomes a regular flow, certainly the prices of WTI...Forties is a great example.

A lot of Forties, while it represents...they're represented in the dated Brent marker, a lot of Forties does move to Asia, and at times most of the Forties. And that has no doubt made the Forties price maybe, at times, more representative of Asian economics than European economics. That's a very good example of how this could happen. And certainly, with Murban, you know, if it grabs hold and that price becomes indicative of a lighter grade in Asia, that's going to become a reference for a lot of these grades, WTI, some of the North Sea grades, ESPO on the other side of Asia, those are all things that are going to have to reference because that is going to become the market representative price in Asia. It could well develop into that over time.

Alejandro: Well, it seems that, from what you say, it's definitely going to have a global impact. And I'm thinking not only in terms of the pricing of the crude but also in terms of wider policy, your production policy in the Middle East. We have seen some reports in the press that IFAD Murban may somehow undermine Opec and its ability to restrain crude supplies going forward. Why would a core Opec member entirely give away control of its oil pricing when the group's efforts have been key to rebalance the market and support prices?

Karl: Yes, you've got two questions there. First of all, why is IFAD doing this? Well, there's several reasons, and obviously, they want to ensure a fair market price both for them and for their customers. They've got a stream of crude oil that they want to make sure moves to market, they want to make sure it moves steadily out the door, and they want to make sure they're getting a fair market price for it. So, and particularly a low price transparency region like Asia, this is a really smart move. It really guarantees them a fair price and guarantees that their customers can obtain that crude at a market representative price. So I think the answer there is probably just as simple as that. You're setting up a good price mechanism in a market that's not the most transparent.

As far as the Opec question, these aren't really mutually exclusive. The oil market is a really big pool and, you know, the supply expands and contracts. The Opec issue is one, I mean, it's possible...the UAE is a member of Opec and it is possible that they, you know, could have a quota allocation on that that they had to reflect on their crude production, and certainly they do have other grades they can take it in. But, you know, as long as the cuts to, you know, Murban production...and let's face it, they could have field maintenance cuts, they could have...there's other cuts that might be non-Opec related.

As long as those are planned ahead of time and don't affect the oil that's already under contract, you know, there's other grades of crude out there. If there's less Murban and the price goes up a bit, people will opt for other grades. They could get extra light, they could get, you know, Qatar Land, they could bring in grades from outside. So the price can't get too far out of line really. It's a legitimate concern on one level, but really, if you look at the whole oil market as a big pool, there's no reason that the Opec issues would have to conflict with the futures market, and that's the bottom line.

Alejandro: Well, I guess Opec is trying to make its crude competitive anyway and, you know, this new pricing mechanism will help them in that way. So, we thank you very much for the opportunity to discuss these topics with us today.

And for more information on Argus Middle East crude prices, which is available in our Argus Crude service, please visit www.argusmedia.com. Thanks for tuning in this week. And we look forward to you joining us on the next episode of The Crude Report.

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