A strong start for IFAD Murban crude futures in its first month

As such, April was the first calendar month that a full trading cycle for the contract was completed, with oil market participants reviewing each and every movement on the exchange closely through the month. The market is also keenly observing how the new futures contract will fit into the existing ecosystem of highly liquid hedging instruments, namely Dubai and Brent futures.

Figures for the first month of trading indicated that it got off to a strong start, with an average daily trading volume of 6,625 lots — equivalent to 6.625 million barrels a day — seen on the exchange. Open interest, which is the record of contracts that have yet to be settled, topped 41,000 lots, which is another strong number for the first month of trading.

In addition, there has been trading activity in forward months of the contract.  This is typically a sign that risk management activity is being done as physical oil buyers and financial market participants look to hedge prices for future loading months.

The setting of the official selling price (OSP) for Murban off Murban futures by ADNOC, along with the removal of all destination restrictions for its crude grades, signaled a change in approach to the marketing of its crude.  In the past, much of ADNOC’s Murban crude grade was limited to long-term contracts with refiners in Asia.

The change in OSP pricing means that each day the contract trades it has a marker price that is of key interest to those that trade not only Murban but also the other main Abu Dhabi crude export grades of Upper Zakum, Das Blend and Umm Lulu, as the prices for these grades are now set as a differential to the Murban OSP.

As a result of the change in OSP pricing methodology, the broader oil market has now started to value and trade all Abu Dhabi grades against benchmark Platts Dubai crude assessments, which are used directly or indirectly in the pricing of nearly all Middle East crudes as well as grades from Far East and Russia.

Murban futures averaged in April at $63.35/barrel, meaning that, for the first time, the price of Murban crude was not set by ADNOC, but was instead set at the market determined level for the grade.

As the month drew to a close, 5,110 contracts went to expiry on April 30th, equivalent to 5.11 million barrels for physical delivery in June, according to ICE data. This means that during the month of June the Port of Fujairah will see over 5 million barrels of Murban crude physically delivered from the exchange onto tankers.

These physical deliveries in June bring with them a new era in the way crude is traded in the Middle East as it will be the first time that an OPEC member, and one of its largest producers, moves away from selling its crude through long-term contracts with strict terms and conditions, and instead allows the physical lifting of its barrels purchased by members of a futures exchange.

With June a few weeks away, the market will be waiting to see where those physically delivered barrels end up. Murban has a wide appetite across Asia and those that have bought the barrels now have the flexibility to optimize their end destination depending on the strongest market at the time of requirement.

As the physical deliveries start to take place, futures trading for the month of May will in turn have concluded and the market will have another month of trading activity data to digest and review. This signals the importance that market participants place on the contract as it is used to price over 2.4 million barrels a day of crude.