At a time when highly leveraged U.S. exploration and production (E&P) companies have been struggling with dwindling valuations, shrinking credit lines, and mounting bankruptcies, Middle East state-owned oil and gas companies (NOCs) appear to be having little trouble courting foreign investors. The majority of investors are aware of oil giant Saudi Aramco’s moves, including its IPO and (self-estimated) $2 trillion valuation. Few, however, know about the other Middle East oil giant that could actually beat Aramco to the public punch: The Abu Dhabi National Oil Company (ADNOC).
Faced with a specter of shrinking oil demand and a global shift to greener energy, the United Arab Emirates (UAE)—of which Abu Dhabi is the capital—is pulling all stops to fully monetize its considerable hydrocarbon resources.
The Emirates’ latest exploit: Opening trade in its Murban crude to compete with WTI and Brent crude.
Abu Dhabi has just launched the Murban crude futures contract, offering a potential rival benchmark for trading Middle East crude.
The contract will be traded on the new ICE Futures Abu Dhabi (IFAD) oil exchange.
IFAD partners include PetroChina (NYSE:PTR), BP Plc (NYSE:BP), Total (NYSE:TOT), Vitol, Inpex, Japan’s Eneos Holdings, South Korea’s GS Caltex, and Thailand’s PTT Plc. The IFAD launch was delayed by nearly a year due to the COVID-19 pandemic.
Murban is a light sweet crude with an API gravity of 39.9 degrees and a sulfur content of 0.78%.
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Middle East Benchmark Abu Dhabi has an ambitious plan for Murban crude to benchmark Middle East crude, good for a fifth of global crude supply.
The Murban contract will price the flagship Abu Dhabi grade that accounts for more than half of ADNOC’s production, thus offering an alternative benchmark to Oman crude futures traded on the Dubai Mercantile Exchange (DME) and Dubai, operated by S&P Global Platts.
The Gulf’s biggest producers—including Saudi Arabia, UAE and Iraq—have traditionally priced their crude using foreign benchmarks from other regions. The Arab nations have mostly sold their crude directly to refiners or international companies with stakes in their fields but also crucially prevented those customers from re-selling that oil and benefiting from arbitrage opportunities.
Abu Dhabi hopes that relinquishing control over prices of Murban to investors and traders will fortify its position in the international oil market. The main goal is to make crude more attractive to refiners in Asia, where oil producers are battling for customers as Western governments attempt to phase out fossil fuels.
Once sold, Murban will be sent by pipeline to Fujairah, where Abu Dhabi’s desert fields connect with global markets. To help this cause, ADNOC plans to spend nearly a billion dollars building ~40 million barrels of storage space in caverns beneath Fujairah’s mountains. By adding to ADNOC’s existing storage, the port will have ample space to hold enough Murban to manage any future supply disruptions.
In fact, Fujairah will hold enough Murban to provide a level of liquidity in-line with, or greater than, that by leading benchmarks such as WTI and Brent.
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ADNOC has pledged to provide the exchange with ~1 million barrels of Murban per day over the next year, comparable to benchmarks such as Brent and West Texas Intermediate.
Will traders readily take up the Murban futures?
The big risk here is that oil traders tend to dislike change, especially when they believe the markets are already doing a good job matching supply and demand. For instance, S&P Global Platts was forced to shelve plans to overhaul Dated Brent indefinitely after the announcement caused a major uproar on trading desks. Further, Murban will have to contend with competition from well-established regional benchmarks. There is also the danger that the Murban exchange and capacity boost could raise tensions with OPEC as the organization continues to curtail production in a bid to balance the markets.
The UAE, though, has moved to allay those fears by saying that Murban futures won’t affect OPEC or its ability to stabilize oil prices.
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It’s still too early to tell, but early signs have been pretty good, with prices for Murban futures rising 0.6% on Monday to $63.90 a barrel. Trading was brisk, with more than 6,300 lots, equating to over 6.3 million barrels of crude, changing hands by 5 p.m. local time, or 9 a.m. ET. Each lot is 1,000 barrels.
Some experts have slated Murban to become a major hit.
Total CEO Patrick Pouyanne has told CNBC that volumes at the new benchmark “might very quickly overpass these existing benchmarks.”
“We’ve seen an evolution--Aramco is all listed, you know, you trust the markets or going from a traditional economy and we’ve seen that governments in the region are all going towards free markets which I think is good for the global economy and for the future of the region.”
By Alex Kimani for Oilprice.com
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There are, however, four downsides to Murban. The first is that the global oil market is already overcrowded with benchmarks.
The second downside is that although the UAE is the third biggest crude oil producer in OPEC, the amount of the Murban crude it could offer the global oil market is small amounting to around 4% of globally traded oil.
The third downside is that if the objective is for Abu Dhabi to relinquish control over the price of Murban to investors and traders, wouldn’t selling its oil in the spot market achieve the same goal? However, it may add to the volatility of the Murban price.
The fourth downside is that there is also a risk of weakening OPEC+’s ability to balance the global oil market and bolster oil prices. If asked to join OPEC+ production cuts in the future, the UAE could tell OPEC+ that it can’t adhere to the cuts since it has neither control over the amount of Murban sold in the market nor over the price it is sold. In other words, the volumes that UAE offers to the market might conflict with OPEC+ plans to balance it.
Still, only time will tell whether Murban will be a success of a flop.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London