Complex Made Simple

Can Abu Dhabi’s Murban crude compete with Brent and WTI?

After Abu Dhabi began selling futures contracts for its oil, aiming to ship the barrels from Fujairah, it marked an aggressive shift by the emirate. It hopes to change the way nearly one-fifth of the world’s crude is priced

Once sold on an exchange, Murban will be sent by pipeline to Fujairah ADNOC is spending $900 million to build 40 million barrels of storage space beneath Fujairah’s mountains UAE’s Fujairah emirate is to dramatically expand over the next 10 years

After Abu Dhabi began selling futures contracts for its oil and then shipping the barrels from Fujairah, it marked an aggressive shift by the emirate. It hopes to change the way nearly one-fifth of the world’s crude is priced.

Persian Gulf states pump nearly 20 million barrels of oil a day and Abu Dhabi wants the futures for its flagship Murban grade to become the region’s main benchmark.

The Gulf’s biggest producers like Saudi, Iraq, and the UAE have traditionally priced their barrels based on benchmarks from other regions. They’ve mostly sold their crude directly to refiners or international companies with stakes in their fields preventing those customers from re-selling the oil and benefiting from arbitrage opportunities that exist in energy markets.

Now, Abu Dhabi’s removing those curbs with the aim of opening up its oil to financial as well as physical traders. 

Once sold on an exchange, Murban will be sent by pipeline to Fujairah.

“If successful, and I think the chances are good, Murban futures could be a pivotal moment for the Middle East crude pricing,” said Vandana Hari, founder of Singapore-based Vanda Insights, which provides oil analysis. 

If “a sizable chunk of Middle Eastern crude trades freely in the spot market,” that could push other regional producers to follow Abu Dhabi’s lead, she said.

To help its cause, Abu Dhabi National Oil Co. (ADNOC) is spending around $900 million to build 40 million barrels of storage space in caverns beneath Fujairah’s mountains. That, and tanks Adnoc already has at the port, will ensure there’s plenty of Murban on hand to manage any future supply disruptions.

ADNOC can pump about 2 million barrels a day of Murban and has pledged to provide the exchange with half that amount over the next year, in line with or greater than the supply of today’s major oil benchmarks such as Brent and West Texas Intermediate.

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Creating a new benchmark will hardly be easy. Oil traders dislike change, especially when they believe markets already do a good job matching supply and demand. 

Abu Dhabi says the combination of high supply, easy access to oil-consuming markets from Fujairah, and the absence of trading restrictions will attract plenty of buyers to its exchange. 

Philippe Khoury, a former HSBC Holdings Plc energy banker who ADNOC hired in 2018 to build its trading operations, said Murban may even compete with Brent and WTI.

The futures platform will be run by ICE Futures Abu Dhabi platform (IFAD) – in partnership with the Intercontinental Exchange (ICE) Intercontinental Exchange Inc. in Atlanta. Recently, ICE approved Goldman Sachs Group Inc., Citigroup Inc., and 22 other banks and brokers as exchange members.

The UAE aims to increase output capacity from about 4 million barrels a day now to 5 million by 2030, which would make it OPEC’s biggest producer after Saudi.

UAE’s big plans for Fujairah 

At the center of UAE’s plans within the country’s Circular Economy Policy 2021-2031, will be new investments, along with new conventional and unconventional oil discoveries, to help boost the production of Murban. 

The light, sweet Murban crude oil grade is one of the four crudes produced by ADNOC, although it accounted for around half of the UAE’s total near-4 million bpd crude oil production before the outbreak of the COVID-19 pandemic. 

According to ICE and ADNOC, Murban futures is the second futures contracts traded on a regional exchange after Dubai Mercantile Exchange’s Oman crude futures.

Murban is also a deliverable grade in the Platts benchmark Dubai and Oman crude assessments. 

ICE and ADNOC partnered with BP, GS Caltex, Inpex, ENEOS, PetroChina, PTT, Shell, Total, and Vitol to launch the IFAD, and ICE has also announced agreements with Chevron, Trafigura, and Occidental to explore using the contract to price crude exports from the U.S. to Asia.

UAE’s Fujairah emirate is to dramatically expand over the next 10 years because of these developments. 

Already the world’s third-biggest bunkering center, Fujairah is set to continue to benefit from its highly advantageous strategic position outside the perennially troublesome Strait of Hormuz and outside the rest of the Persian Gulf as well.

It offers an unencumbered direct port on the eastern side of the Gulf of Oman, which means that any oil kept there will be able to avoid any blockade on ships passing through the Strait of Hormuz. 

Even as it stands, Fujairah is the key hub from which the UAE’s Murban oil is exported, making its way there through the 360 kilometer Abu Dhabi Crude Oil Pipeline from the Habshan onshore field in Abu Dhabi and capable of transporting 1.8 million bpd. 

According to recent statements from the Fujairah port development authorities, it may add a tenth berth shortly as part of plans to boost overall storage capacity across the site to 17 million cubic meters in the next 3 to 4 years.