Viewpoint: Asia wary over Murban crude futures contract

The big event for Asian crude markets in 2021 will be the launch of Abu Dhabi's Murban futures contract, although if history is any guide, it could be some time before the new contract triggers wider changes in regional crude pricing.

The Intercontinental Exchange (Ice) is aiming to launch the Murban contract on 29 March, subject to regulatory approvals. Ice was selected by Abu Dhabi's state-owned Adnoc in late 2019 to host the Murban contract and has established the new Ice Futures Abu Dhabi (IFAD) exchange for that purpose, with nine shareholders — BP, GS Caltex, Inpex, JXTG, PetroChina, PTT, Shell, Total and Vitol.

The Murban monthly export price will likely be the monthly average of the daily settlement prices of the front-month IFAD Murban futures contract. When launched, the IFAD contract will set the official monthly export price for Abu Dhabi's flagship Murban crude, while official export prices of Abu Dhabi's other grades — Das, Upper Zakum and Umm Lulu — will be linked to Murban.

The Murban official monthly export price is currently set by Adnoc at a differential to Dubai crude assessments published by price-reporting agency Platts. Around 1.1mn b/d out of current Murban output of 1.6mn b/d is exported, to a mix of Asian refiners.

But Adnoc has bigger ambitions for the Murban futures contract, and would like to see it used to price other crudes from the Mideast Gulf and elsewhere. Three companies have already signed initial agreements to look at the potential for using the IFAD Murban contract as a benchmark for US crude exports to Asia. In theory, Murban should be suitable for pricing US light sweet WTI crude, as the two grades to some extent compete for the same Asian buyers. Light sour Murban is also closer in quality to WTI than medium sour Dubai crude, which is currently used to price some US crude exports to Asia.

The IFAD Murban launch follows China's roll-out of its INE crude futures contract in Shanghai in March 2018. The INE futures contract was promoted in part as an alternative benchmark to Dubai for deliveries of Mideast Gulf crude into China. But that has yet to take off. Sales of crude from INE storage tanks do use INE contract prices, but Mideast Gulf producers have stuck with their own official export prices for term sales to China, using Dubai and Oman crude as benchmarks. Spot crude sales to China's independent refiners have also continued to be priced against Ice Brent futures.

Resistance to change?

It is also unclear if other Mideast Gulf producers will want to make further changes to their crude pricing practices in the near future. Saudi Arabia, Opec's top exporter, moved away from assessments published by Platts to futures contract prices published by the Dubai Mercantile Exchange (DME) for the Oman component of its export pricing formula just over two years ago. This move was followed by Bahrain and Kuwait. Qatar's state-owned QP also started setting its new forward crude export prices against Oman and Dubai assessments published by Platts for the first time in early 2020, switching away from its longstanding tradition of setting export prices retroactively on an outright basis. Iraq's state-owned Somo has for many years used Oman and Dubai assessments published by Platts to set its official crude export prices.

In a market that tends to hold on familiar benchmarks, even if flawed, for a long time, it is difficult to see who, beyond Adnoc, might be the first to explore this new pricing option. Some Asian refiners are concerned about using just one crude in pricing, fearing that production or supply disruptions could lead to a spike in the benchmark price. Platts' Dubai crude price assessments are based solely on 25,000 bl partials traded during its 30-minute market-on-close (MOC) Singapore window, but a seller can choose to deliver either Dubai, Oman, Upper Zakum, Al-Shaheen or Murban crude, if there is physical convergence in the window.

All this suggests that it may take time for Murban to gain a foothold in the pricing of Mideast Gulf crude exports, with many companies likely to take a wait-and see stance. The DME's Oman crude futures contract, launched in June 2007, offers a salutary lesson. The contract was used immediately by Oman and subsequently by the Dubai government to set official prices for their crude exports. But it took a decade before another Mideast Gulf producer, Saudi Arabia, began using DME Oman futures as part of its pricing formula.

By Azlin Ahmad