The Crude Report: IFAD Murban – a maturing crude oil benchmark?

Author Argus

Murban futures traded on the ICE Futures Abu Dhabi (IFAD) exchange have raised multiple dreams and aspirations.

In this episode of The Crude Report, Alejandro Barbajosa, VP Business Development and Karl Kleemeier, Head Oil in Asia, take a closer look at how the contract is faring. We aim to provide answers as to how fast Murban may evolve from a fledgling price reference to a maturing crude benchmark in the Middle East, looking at liquidity, market depth and levels of participation relative to expectations. 

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Transcript

Alejandro: Hello, and welcome to the Argus' Crude Report, a podcast series on global crude oil markets. I'm Alejandro Barbajosa, vice president for crude in Asia-Pacific. And joining me is my colleague, Karl Kleemeier, who heads the oil sector in Asia at Argus. Today, we will be discussing recent trends in terms of the development of the IFAD Murban futures contract. It has been close to three months since the United Arab Emirates, ADNOC, the National Oil Company, and the ICE futures exchange introduced the IFAD Murban futures contract amid expectations that it will gain traction as a major indicator of value for Middle Eastern crude.

Over the past few weeks, we have seen the price of IFAD Murban futures rising towards that of ICE Brent, while other Middle East markers have remained under some pressure. So, Karl, I would like to ask you, would you expect this to be a temporary divergence, or will Murban reassert itself as an indicator for the value of light sweet arbitrage grades from the Atlantic basin into the Northeast Asian market, as opposed to medium sour crude from the Middle East?

Karl: Thanks, Alejandro. I think, you know, with the IFAD Murban market, it's a relatively new market. And it will be interesting to see where the Murban price goes given that it's never really traded independently before. The regional market has always looked on it as related to the market and it's always been priced versus Dubai. And it's never had a chance to travel on its own as it were. So it will be interesting to see. I do believe it is inherently an Asian crude, and it will eventually relink to Asia.

But you know, for now, it is coming up closer to Brent. And I think that's an indicator of where the market is headed right now. Dubai is quite low, and a lot of the exports and things are headed toward Europe these days, and that has reflected in the price of Murban. And ultimately, though, its main market, where most Murban ends up is Asia, and the price will have to reconnect at some point.

Alejandro: So actually, this makes it quite interesting because it seems to me that Murban then would be a very flexible marker that would adapt, and at some points like now, like, you highlighted, reflect those Atlantic basin fundamentals while if we see weakness in the Atlantic basin, we could see it reverting to be based and reflecting whatever is happening out of the Middle East and in Asia, right?

Karl: Absolutely, absolutely. It definitely has the potential to be a swing marker between those regions. And, you know, we'll kind of have to see how it develops. Some of that just depends on how the market trades it. But the potential for that is absolutely there.

Alejandro: Going on a bit more into the valuation of Murban, most refiners in Asia expect that trading of spot Abu Dhabi crude barrels will continue to happen on a Dubai-related basis. But there are also some who have been quite optimistic that soon we could see a transition towards Murban-related trade. Do you think now, based on what we've seen in the past two and a half months, there is sufficient liquidity and open interest developing in Murban futures for a shift in spot trade that would align Abu Dhabi grades with the IFAD basis used for the setting of the official selling prices?

Karl: Definitely. You know, a lot of it does come down to the fact that, you know, all markets inertia is an amazing thing. The market has been used to trading not just the other Abu Dhabi grades, but Murban as well against Dubai. And now Murban has separated itself and is trading independently. The Emirates have moved to pricing their grades off Murban as well, but the market continuing to price them against Dubai because they want the liquidity. They want the comfort because they know that all their other barrels are priced off Dubai.

But the potential is definitely there as we move forward. You have to remember we're only a couple of months into this. And certainly, as we move forward, the market players are going to be looking to see if there is some advantage or a reason to start trading against Murban. And if the liquidity in Murban is good, the OSPs are currently set versus Murban. So there is a fair amount of basis risk that market players are taking price trading them against Dubai, especially as we've seen now. Murban and Dubai are having a big separation.

So there is a basis risk there for somebody taking something, buying it based on Murban, reselling it, or hedging it based on Dubai, whereas you'd eliminate that basis risk by doing those transactions against Murban. So, the potential is definitely there. We'll just have to see if the market moves in that direction in the coming months or years.

Alejandro: So you talk about divergence in different pricing mechanisms in the Middle East, and there has been a lot of volatility. Is there any way in which you can anchor the value of Abu Dhabi grades in terms of their refining value to ensure that buyers and sellers can refer to them as a guide for trading?

Karl: Definitely. That's a really good question. Ultimately, you know, the price is the main indicator if crudes or any commodity really trades regularly. Another way to look at it, and refiners look at a crude they say, "Well, what's this crude worth to me? What's the refining value?" And then normally, they would look out in the market and say, well, I know the refining value is this of this grade in my refinery, what is it trading for? Can I make money on it if I buy it at that value, and I get the best price, and I can get this value out of it?

So one method of evaluating the market value is looking at a refining value or the gross product worth-based valuation. At Argus, we call those refinery gate values. And comparing those, and looking at that difference versus Murban, we can assess what, for example, the Emirati grades are worth versus Murban in the market based on the refining value, based on product pricing.

And those move with product pricing, and they all tend to be fairly stable right now, but it gives an indication of what those grades would be worth relative to Murban in the market. And Argus has started publishing these in our Crude Report, just to help inform the market of the value of these grades, including the Qatari grades, Qatar Land and Qatar Marine, all versus Murban on a refining value basis just to shine some light on that part of the market.

Alejandro: I think that's quite important because, of course, whenever you see this sort of volatility, people are looking for those references of value that may have a bit more consistency going forward. To take us towards the end of this conversation, I'd like to perhaps throw the conversation a bit wider and try to understand how Murban is behaving today relative to the launch of other futures contracts.

In the past, we've seen volatility in DME Oman. We've seen volatility even in NYMEX. We've seen volatility in Brent. Every contract is susceptible to this sort of end-of-month volatility. Do you expect that or is there anything that IFAD can do to reduce the concerns about continued volatility at that point? Or do you think this is something that as the market matures will be fixed on its own with the trade and the liquidity?

Karl: That's an excellent question. I think DME had some issues with that and ended up they had very little trade at the end. And it's a problem inherent with the cargo market, to be honest. You know, when you're shipping full cargoes as opposed to the NYMEX, which you can actually deliver in tank at fairly small volumes. But liquidity tends to dry up at the end of the month because nobody wants to get caught short or long and not able to make a full cargo.

So you end up with a fair amount of price volatility as people try to clear their positions toward the end of the month. And eventually, people just stay away from that point in the month and there's very little trade. The DME handled it by actually pricing out the final day, the expiry day, based on the actual M-2 price, plus a historic time structure, M-1, M-2 time structure in the previous few days. Obviously, if you've got plenty of liquidity all the way through the curve, the and volatility will take care of itself for the most part. You're going to have a little bit, but that happens.

The other thing, and as we mentioned is the availability of storage, which you have it in the NYMEX contract for WTI, the big tank firms at Cushing. If there was a similar storage situation for Murban, and people could take delivery in storage or deliver out of storage, that would also help with some of those volatility issues, basically, being able to make delivery, you know, at some relatively small volumes. That would clear up some of those issues. But these are all issues that the exchange will have to look at going forward once the trading settles down a bit and, you know, a normal trading pattern results.

Alejandro: Well, that's quite interesting. There seems to be still a lot going on. And, definitely, this is only the beginning. And there's a lot more to happen, and we hope that we can continue discussing these topics with you as the market moves along. We want to thank you very much for your participation today. And for more in-depth daily coverage of crude oil markets, please consider subscribing to Argus Crude. You can find more information on this service at www.argusmedia.com. Thanks for tuning in, and we look forward to you joining us on the next episode of "The Crude Report."

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