What Adnoc's Murban futures launch means

A look at the various operations and what's being launched

Adnoc's flagship Murban crude will start trading on the new local exchange ICE Futures Abu Dhabi (IFAD), in the form of futures contracts, for the first time from Monday, March 29.

The oil has been pumped from Abu Dhabi since 1960 and since been exported around the world. As Adnoc expands its trading and oil storage, the crude grade is set to become an even more international product.

With the launch, Murban is expected to play an increasing role in global energy markets and, in future, potentially become the world's reference point for the cost of a barrel of oil.

But what does this all mean and how will it affect the UAE? The National explains.

What is an oil benchmark?

An oil benchmark serves as a reference price for buyers and sellers of crude oil.

While there are dozens of oil benchmarks – each representing a particular part of the world – the price of most are pegged to the three primary benchmarks: Brent Crude, West Texas Intermediate (WTI) and Dubai/Oman.

Brent is the most widely-used benchmark for crude and is based on production from the North Sea, which is currently in decline. Around two-thirds of all crude contracts globally reference to Brent.

Saudi Arabia – the world’s largest oil exporter – uses the Dubai/Oman benchmarks quoted on the Dubai Mercantile Exchange, which is the most commonly used Middle East standard.

Abu Dhabi's unique grade of the Murban crude is fast becoming the benchmark grade across Asia.

Adnoc said the goal is for the oil market to use Murban as a price marker alongside other global oil benchmarks.

Why is Adnoc doing this?

It’s a major step for Adnoc - further reinforcing Abu Dhabi’s status as a global energy hub. It also marks a significant step for Adnoc in its transformation into a more modern and international energy company.

Adnoc group chief executive, Dr Sultan Al Jaber, said "to list Murban on an internationally recognised exchange and improve the terms of sale of Adnoc's Murban Crude, is another significant step in our transformation.

“The initiative will enable our customers and other market participants to better price, manage and trade their purchases of Murban. This historic and strategic move cements the UAE, Abu Dhabi and Adnoc's role in the international oil and gas sector.”

During the launch of the exchange in 2019, ICE chairman and chief executive Jeffrey Sprecher said, “Murban futures will sit alongside the most significant global oil benchmarks, providing the opportunity for the first time for a much larger group of participants to trade and hedge Murban in a regulated, transparent and accessible venue.”

Ehsan Ul-Haq, lead analyst of oil research and forecasts at Refinitiv, said the status of being a benchmark normally “results in slightly higher prices”. He said it would also help raise the profile of the crude and the oil company.

Brand Finance, in its assessment of Adnoc as the UAE's most valuable brand in its Global 500 2021 report, said, “Adnoc once again is set to raise the profile of Abu Dhabi and the GCC through the launch of the highly anticipated futures exchange for Murban crude.”

What is a future contract?

Several types of contracts exist on the global oil market, among them are physical and future. A physical contract is typically made at a price that is determined at the time of delivery. This leaves the buyer at the mercy of the market. While a futures contract is an agreement to buy or sell crude in the future at an agreed, set price.

For big industries, such as aviation, future contracts offer an opportunity to lock in contracts to buy large amounts of crude at a predicted but fixed future price out of fear that the price will rise. This will potentially protect them from a volatile market.

Buyers could end up saving money if the oil price rises by the time they are due to take delivery. It also means they could have overspent if the price per barrel drops.

For example, if crude is selling at $50 per barrel for May 2021 and an airline purchases a million barrels for delivery, should the price rise to $60 by that month, they will have saved money.

On the flip side, if an airline buys at $50 per barrel for May 2021 and oil prices drop to $40, they will have lost money.

Futures contracts also allow traders to speculate and profit from changes in oil prices, without having to take physical delivery, so long as they sell contracts before the expiration date.

Given that oil prices can fluctuate on any piece of news regarding pricing, it makes it a favourite of swing and day traders looking for an edge.

“If I buy or sell crude at a certain time, most of the time it results in physical delivery, but with futures there is no delivery clause,” said Mr Ul-Haq.

“Instead of getting the physical delivery on a certain day, what will happen is that I will get a cash settlement, in dollars, at the fixed price that crude is selling.”

The ICE Murban Crude Oil Futures contract will be based on a two-month delivery. The first contract for June delivery will expire at the end of April.

Contracts traded at the Abu Dhabi exchange will be cleared at ICE Clear Europe alongside global benchmarks such as Brent, WTI, ICE Platts Dubai and ICE Low Sulphur Gasoil.

Do people actually have to take delivery of oil if the contract expires when they’re holding it?

You don't have to take delivery - it can be cash-settled if it's a futures contract. In the physical market, you have to take delivery. In the futures market, you can trade more crude than what is available - sometimes several 100 times.

How much oil trades hands through these futures contracts?

Trading in oil derivatives is substantially larger than the physical market for oil, with about 2.5 billion barrels per day traded on exchanges, compared to about 100 million barrels used physically per day.

Abu Dhabi, United Arab Emirates, November 11, 2019.  
ADIPEC day 1 PRESS Conference.
--  (centre) H.E. Sultan Ahmed Al Jaber, Minister of State, United Arab Emirates, the Director-General and CEO of the Abu Dhabi National Oil Company (ADNOC Group), during the Press Conference.
Victor Besa / The National
Section:  NA
Reporter:  Jennifer Gnana

Where can people trade in the Murban future contracts?

On ICE Futures Abu Dhabi (IFAD) from March 29.

Established in Abu Dhabi Global Market, IFAD is a new exchange launched by Intercontinental Exchange, which operates global exchanges for financial and commodity markets. It also owns and operates clearing houses, which act as an intermediary between a buyer and seller in a financial market.

IFAD will operate as an exchange for buyer and sellers, and as a clearing house.

Nine of the world’s largest energy traders will join ICE and Adnoc as founding partners in IFAD, including BP, PetroChina, Shell, Total and Vitol.

Contracts traded at IFAD will be cleared at ICE Clear Europe, a leading energy clearing house, and will clear alongside ICE’s global energy futures platform covering oil, natural gas and the environmental complex, allowing customers to benefit from associated margin offsets.

To trade futures, you have to set up an account with a broker who handles futures trading.

How is Adnoc able to launch the futures contract?

In order to be a benchmark, there should be enough production, Mr Ul-Haq explained.

“If production is low, then it's very difficult to declare crude as a benchmark,” said Mr Ul-Haq.

“It should also be accepted by the trading industry, which means the main players, the major oil companies and the trading houses.”

Murban is Adnoc's largest crude by volume. A high-quality light-sweet grade crude oil, Murban has reliable and stable high production volumes from numerous long-term concession and production partners, including Total, BP, PetroChina, INPEX, ZhenHua, GS Caltex.

Output of Murban light crude is about 1.6 million to 1.7 million barrels per day (bpd).