A New Benchmark in Town?
Dear Brent, WTI,
“Where’ve you been lately? There’s a new kid in town”. You are soon to be exposed to the fickle nature of fame; At least that’s what The Eagles’ “New Kid in Town” is about — the idea that somebody new could come along and share your spotlight or replace you altogether (“they will never forget you till somebody new comes along”).
Relax, I’m only talking about the former. But the thing is, it seems that, “everybody’s talking about the new kid in town”.
Earlier this week, futures contracts for Murban crude (The UAE’s flagship oil grade) began trading under the symbol “ADM” — it has the potential to establish itself as a third global oil benchmark alongside yourselves on every trader’s screens. Adnoc has also eliminated the “destination clause” on Murban and three other crude grades, ie: These crude grades can now be sold freely with no restrictions on future resale. This is the first time that a Persian Gulf OPEC member has allowed for its oil to be shipped freely and sold globally.
Murban flows at approximately 2 million barrels per day (It’s March 29, 2021 at the time of writing this, and the next OPEC meeting is on April 1, 2021) and is shipped to customers across the globe including but not limited to India, China, and Japan. While I understand this gives you both some tough competition (particularly having seen Brent’s recent production output levels), let’s wait to see the trade volumes over the next few weeks and get a clearer picture of what the forward curve looks like (bid/offers for future months) — at the end of the day it will depend on supply and demand.
If volumes are high and oil traders are encouraged to change, there’s a good chance that countries and companies in the Middle East can use this regional benchmark not only as a tool for hedging, but also as a reference for pricing over the next decade. While most countries and companies use other benchmarks to price much of their crude, new contracts could be priced as a differential to Murban if it gains traction in the region. I doubt existing contracts will be modified to use Murban as a benchmark (like how existing agreements/contracts with “fallback” provisions for a replacement rate are being modified to replace LIBOR with SOFR) since the existing crude benchmarks are still available.
How this will play out, only time can tell. My advice would be to continue to play your crucial roles and work together as tools that the market needs for pricing and hedging risk.
Regards,
Dhruv
This piece is purely my opinion and does not represent the opinions of any person, group, website or firm
