Will the UAE’s bid to set a new global oil benchmark succeed?

The Murban crude futures contract was launched on Monday in Abu Dhabi, the key contract of the new ICE Futures Abu Dhabi (IFAD) oil exchange, in a move that marks a major change in how the oil-rich emirate prices its crude exports.

By doing so, it sets the stage for Murban to become a rival benchmark in the trade of Middle East crude. Murban is the UAE’s flagship crude grade and makes up more than half of the country’s total output.

Trading on the IFAD exchange, the Murban futures contract will let the market determine the price of Abu Dhabi’s oil and replace the less transparent pricing methods that were being used previously.

On its first trading day, the contract for June - the first month for which cargoes will be available - traded at $63.78 per barrel. The volume in Murban for June and for July both exceeded 2,200 lots, while more than 1,100 August contracts changed hands and several hundred did for September. Each lot amounts to 1,000 barrels.

IFAD is backed by the Atlanta-based Intercontinental Exchange Inc., Abu Dhabi National Oil Co. (ADNOC) and nine major international oil partners including British Petroleum (BP), Total, Shell, Vitol and PetroChina.

With 90 percent of the light grade oil currently being sold to Asian markets, two major Chinese crude importers – refiner Rongsheng and state-run trading firm Unipec – have also expressed interest as potential shareholders.

The UAE, the third largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC) behind Saudi Arabia and Iraq, pumps about 2.5 to 3 million barrels per day (bpd), mostly produced by ADNOC.

The UAE holds almost 6 percent of the world’s known oil reserves, and oil and gas accounts for about 30 percent of the country’s GDP. Although committed to a post-hydrocarbon future, Abu Dhabi wants to monetise its crude assets in the short-term alongside its long-term green investment strategies.

Industry observers see the move as a bid to establish Murban as a new regional pricing benchmark – an effort to consolidate Abu Dhabi’s role as a major energy player and weaken the position of Saudi-dominated OPEC.

If successful, the Murban benchmark will set the bar for pricing oil in the Middle East and North Africa (MENA), similar to futures benchmarks like Brent Crude or West Texas Intermediate (WTI).

What are oil futures?

Crude oil futures are futures contracts in which buyers and sellers of oil coordinate and agree to deliver specific amounts of physical crude oil on a given date in the future.

The benchmark futures contract for crude oil in the US involves WTI, a particular grade of oil that has fairly low density and sulfur content that makes it relatively easy to refine.

Trading is also common globally for what are called Brent crude oil futures, which involve a different grade of oil found in the North Sea off the European continent.

The specifications for crude oil futures contracts are set in a way that allow market participants to trade them uniformly. Each contract covers 1,000 barrels, and dates for delivery are available up to nine years into the future.

For buyers that need crude oil as a raw material, such as refinery companies, the contracts can ensure they have sufficient future supplies and lock-in favourable pricing.

While the futures markets can be a risky bet for individual investors, energy companies that use futures can often boost their profits and hedge against losses.

Murban’s bid to be the next oil benchmark

Previously, ADNOC sold crude directly to refiners and other customers, setting prices retroactively and preventing those customers from reselling on the global market.

The new futures contract eliminates those constraints, allowing Murban crude to trade and ship more freely on the international market, making it more appealing to refiners in key markets.

Patrick Pouyanne, CEO of Total, said that Murban’s current volumes mean supply will be “enough to establish this benchmark, and then you will see other crude in this region being benchmarked against it”.

With Brent’s declining output, Murban will become “serious competition” Pouyanne believes, adding the Middle Eastern grade could one day become as famous as its European counterpart and surpass existing benchmarks.

Whether or not Murban becomes a new benchmark won’t be clear for some time, as “traders want to see a sufficient volume of deals over time that lead to prices investors deem fair,” Bloomberg reported.

“What is certainly clear is that Abu Dhabi is now putting down a huge market to become an increasingly independent actor in a bid to outpace regional allies in favour of strengthening its future ties with Israel, China and India,” wrote Neil Quilliam, Associate Fellow at Chatham House.

“Although the jury remains out on whether the ADNOC Murban oil futures contract will become the new regional benchmark, it does reveal Abu Dhabi’s clear vision of its future and the role hydrocarbons are going to continue to play in it,” Quilliam added.