IFAD Murban crude futures see strong start but end-month volatility fuel concerns

Singapore — Trading activity for Murban crude futures on the ICE Futures Abu Dhabi, or IFAD, exchange in April points to a strong start for the nascent contract, but traders say end-month volatility in the key front-month contract is a cause for concern.

More broadly, traders say the launch of IFAD Murban has made it easier to value and trade all Abu Dhabi grades against benchmark Platts Dubai, which is used directly or indirectly in the pricing of nearly all Middle East crudes as well as grades from Far East Russia.

Emergence of an active market in Murban/Brent also makes it easier for Asian refiners to shift their exposure to Abu Dhabi crudes to the highly liquid and deep Dubai futures forward curve using the Brent/Dubai Exchange of Futures for Swaps, or EFS, contracts.

IFAD Murban vs DME Oman

Murban crude futures on IFAD recorded average daily trading volume of 6,625 lots -- equivalent to 6.625 million barrels a day -- in its first full month of trade in April, with open interest topping 41,000 lots.

To put that data in perspective, Dubai Mercantile Exchange, which has been in operation for more than a decade, reported average daily volumes of just over 4,600 lots, or 4.60 million barrels a day, in April with open interest of just under 12,000 lots.

Supporters of Murban futures also like to highlight the depth of trading liquidity early in its life with traders and open interest recorded for first the seven months against DME Oman where this was limited to the first three months.

To supporters of IFAD Murban, its relative outperformance on those statistics doesn't come as a surprise.

Supply of Murban crude is around twice that of Oman. Plus Abu Dhabi National Oil Co. has started pricing all exports of Upper Zakum, Das Blend and Umm Lulu grades basis IFAD Murban price. On the other hand, DME Oman too plays a role in pricing of Middle East crudes alongside Platts Dubai, the predominant pricing benchmark in this market.

Comparisons with DME Oman don't end there. Many in the market expected Murban's volumes and a more diverse user base to help avoid the end-month volatility that has plagued the Oman contract for years. But the all-important front-month June contract plunged on expiry as liquidity all but disappeared, surprising many in the market.

"Reasonably OK [start to IFAD] but the collapse in liquidity at the month end is worrying," said a Singapore-based crude oil trader. "The main buyers of Murban futures are producers and traders with an interest in IFAD but they will only spend as much on trying to make it look good."

Liquidity crunch?

On April 30, the last trading day for Murban June futures, IFAD reported trading volumes of just 71 lots as of 7 pm Singapore time. The Singapore marker price -- that's used to price all Abu Dhabi oil exports -- plunged to a premium of 8 cents/b over benchmark front-month Dubai, falling as much as $1/b from April 29.

The contract earlier in the month traded as high as $1.86/b against front-month Dubai.

"It's not often you see the Murban grade differential change a dollar in a month. It's got to be more than just low buying interest," said another crude oil trader in Singapore.

June IFAD Murban Singapore marker closed at $64.84/b on April 30, a discount of $3.43/b to ICE Brent futures at Singapore close. While IFAD data is available only since the contract's launch on March 29, based on historical data of Platts assessment of Murban, IFAD Murban's discount to ICE Brent futures was the widest in a decade -- barring the lows of early 2020 that were driven by a broader coronavirus-related selloff in markets.

In comparison, benchmark cash Dubai for June was assessed by S&P Global Platts at $65.26/b on April 30 while DME June Oman crude Singapore marker price closed at $65.22/b. DME too faced similar liquidity crunch as no trades were reported for the June Oman futures contract on April 30.

Even as activity in front-month Murban contract shrank, IFAD reported trading volumes of 5,464 lots on April 30 across forward months, compared with under 1,500 lots on the DME Oman forward curve. As of May 3, approximately 47% of ICE Murban Crude Oil Futures were traded on the screen while 53% was via block trades, according to ICE data.

All eyes will be on the exchange as it heads into first physical delivery for Murban cargoes with a total of 5,110 lots equivalent to 5.11 million barrels taken to delivery in June, according to ICE data.

"I would like to see Murban get physical delivery right. It took DME three-four years to get it right," said Adi Imsirovic, senior research fellow at the Oxford Institute for Energy Studies in a Gulf Intelligence podcast on April 26.

Costs a concern

Market participants also remain concerned about the relatively high costs involved in taking physical delivery of oil through the exchange.

"Buyers don't want to come to the market because of delivery fee," said another trade with a North Asian refiner. "They need to pay cash prior to loading date, which is expensive," said a trader with a North Asian refinery.

In order to facilitate physical delivery, IFAD offers an Alternative Delivery Procedures, or ADP, for Murban Futures, which allows the buyer and seller to deal with credit risk mutually.