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There's a new catalyst in the Brent/Dubai crude complex

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Platts Global Alert - Oil

There's a new catalyst in the Brent/Dubai crude complex

• Murban crude futures seen aiding widening of Brent/Dubai spread

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• Traders say Murban futures hedge adds to growing Dubai futures liquidity

• Benchmark Platts Dubai premiums to futures rise as Brent/Dubai widens

As theprice spread between light, sweet Brent and medium, sour Dubai crude oil futures widened to the most in more than a year in July, market participants began to question what was driving the rally.

The spread is vital to global oil flows as it is key to the economics of arbitraging oil barrels to Asia from all around the world. A wide Brent/Dubai spread typically makes Dubai-linked crude from the Middle East and Far East Russia more appealing to Asian refiners relative to Brent-linked oil from the rest of the world.

As Dubai futures' discount against Brent futures continued to widen in early July, attention was drawn to the usual suspects -- demand-supply balance of light, sweet versus medium, sour grades with rising OPEC+ supply and Iran's potential re-entry; arbitrage flows; cracking margins for light versus heavy refined products; and what promised to be quicker recovery in the West from the COVID-19 pandemic owing to rapid vaccination.

However, some in the market were also beginning to point fingers towards a new actor -- a futures contract launched just months ago by Abu Dhabi for its flagship Murban crude on the brand-new ICE Futures Abu Dhabi exchange or IFAD.

The exchange had a fairly strong start. Since its launch on March 29, volumes for Murban futures had ramped up to average nearly 7,000 lots a day over April-June and open interest had topped 55,000 lots.

Some argued the trade in Murban futures was adding incremental selling interest in Dubai crude futures as companies buying Murban on the exchange tried to hedge their exposure, thus pushing Dubai into a deeper discount against Brent futures. Others contended Murban volumes were too small to impact the highly liquid Brent/Dubai complex.

But now with more than five months of trade in IFAD Murban futures, traders say there's little doubt that Murban futures are having a tangible effect in the widening of the Brent/Dubai spreads as measured by the highly liquid Brent/Dubai EFS (Exchange of Futures for Swaps) and Brent/Dubai ESS (Exchange of swaps for swaps) contracts.

"There's no doubt Murban has an impact," a Singapore-based trader with a Chinese refiner said. "EFS volumes during [the Platts Market on Close assessment process] have nearly doubled since the launch of IFAD. There's clearly a lot more Dubai [futures volume] going through," he said. The Platts MOC process marks the most active period of trade for the Asian oil markets.

The increased selling interest in Dubai futures comes from a common practice among Asian refiners that typically shift their Brent- or flat price-linked exposure to a floating price against Dubai, using instruments like the Brent/Dubai EFS or the Brent/Dubai ESS.

For example, a refiner that buys November Murban crude at a fixed dollar-per-barrel price on IFAD for physical delivery would simultaneously sell November Brent futures and buy the November Brent/Dubai EFS (buy Brent/sell Dubai) to shift its flat price exposure to a floating price, basis benchmark Platts Dubai.

The cargo would then price out during November, the month of loading, based on the monthly average of the Platts Dubai benchmark that is also used to price or hedge nearly all of the crude flows from the Middle East and Far East Russia to Asia.

Benchmark Platts Dubai catches up with wider Brent/Dubai futures spread

Traders say as tradevolumes for Murban futures ramped up, so has the buying interest in the EFS and ESS spreads, pushing the Brent/Dubai spreads wider and adding to the liquidity and open interest in the Dubai futures forward curve.

While not all the changes in Dubai futures open interest can be attributed to Murban futures, traders say there's enough evidence to acknowledge Murban's influence.

At the end of March, with open interest for Murban futures at just under 8,000 lots, the open interest in the Dubai forward stood at about 575,000 lots. End July, with Murban open interest at over 55,000 lots, the open interest for Dubai ballooned to almost 700,000 lots. At the end of August, when Murban futures' open interest dipped below 45,000 lots, the Dubai open interest slipped to just under 650,000 lots.

Over the same periods, the Brent/Dubai EFS monthly average stood at $2.60/b in March, climbed up to $3.97/b in July and dropped to $3.32/b in August. Similarly, the Brent/Dubai ESS rose from a monthly average of $1.62/b in March to $2.38/b in July, before slipping to $2.16/b in August.

Benchmark Platts Dubai has been quick to adjust to the widening Brent/Dubai futures spread with its premiums rising against Dubai futures. The benchmark Platts Dubai premiums to the same-month Dubai futures averaged $1.19/b in March, rose to $2.35/b in July and inched lower to $2.22/b in August.

While activity in Murban futures is still a fraction of the open interest in Dubai futures, traders say it is helping the benchmark Dubai crude complex by adding incremental liquidity. The presence of a liquid Dubai futures market is in turn helping Murban by providing the risk management tools for the relatively new contract.

For the all-important Brent/Dubai spread itself, while it's driven by a range of factors, the addition of an important new catalyst suggests that perhaps a new normal is in the making.