It will be a goodly time before this report’s preamble, or in fact the whole offering, will be able to avoid any reference to Donald Trump and his ‘event horizon’ created by the war in and around Iran. The gravity, in both senses of the word, is not diminishing and the longer this saga goes on, the fewer opportunities there will be to escape its magnetism for all markets and the global economy. Unless an equitable arrangement is forthcoming, skittish oil prices and their knock-on effect to all other considerations, particularly that of inflation and interest rates, will find fewer places to hide and every person on the planet will feel the repercussion. 

Maybe the US President is starting to feel the weight of frustration. His new orchestration includes the well-worked insistence that Iran is desperate to do a deal, of which there is nothing but scorn in reply from Tehran, and now an attack on domestic oil companies. One should never be surprised anymore at breathless hypocrisy, but according to Mr Trump it is the fault of the likes of Exxon and Chevron as they are making too much money at the expense of Americans struggling to afford the higher gasoline prices at the pump. These are the very same companies who warned on how prices will stay elevated into the autumn because of the lack of refinery capacity in the United States. Turning on the industry he once championed is a sure sign of a vexed President, and one who had planned on offering a much different geopolitical state for voters at the mid-term elections in November.    

Goodbye Murban, it was a brief pleasure

The resounding and echoing influence of the war between the United States and Iran is having profound influence on the state of supply in all manner of commodity markets and the waves and ripples created from price reactions are felt far and wide. What has been unexpected is by interfering in the normal trading way of things, this war is now responsible for the demise of financial instruments themselves. 

On March 29, 2021, the Abu Dhabi National Oil Company (ADNOC) and Intercontinental Exchange (ICE) started trading of the United Arab Emirates’ (UAE) flagship crude oil, Murban, as a Futures contract on the then new ICE Futures Abu Dhabi (IFAD) commodities exchange. Murban has been a favoured ‘sweet’ grade of refiners due to it having properties that allow for yields which produce large amounts of high-demand products including gasoline, jet fuel, diesel, and naphtha. Its lower sulphur content, and with it a reduced carbon-intense process, not only aids refinery margin but also offers cleaner fuel standards in a world very much aware of environmental compliance. ADNOC’s cause was rather an admirable one. Instead of relying on the vagaries and mechanisms of official selling prices (OSPs), it wanted its flagship crude to be scrutinised by the open market format of a regulated futures contract. With daily production at or around 2mbpd, it is no mean amount, particularly as it compares favourably with the Dated Brent Basket which along with the namesake includes Forties, Oseberg, Ekofisk, Troll and US WTI Midland. If the crude arbitrages and pricing for exports became all the more transparent, the more custom and liquidity IFAD would attract rather than having to rely on local grades being either priced or traded by their function to Dubai, Brent or WTI. 

It was never going to be easy in recreating the basket of cooperation seen in the North Sea, there has always been precious and parochial attitudes in which of the many crudes might lead such a thing. The Dubai basket including Fateh, Omana, Upper Zakum and indeed Murban has had a long history of trading and a well-worked relationship with Brent, and when talking on the most important OSP in the area, invariably the first look would be toward Saudi Arabia’s flagship Arab Light. Yet for all these problems, Murban futures volumes since its launch had shown steady, if slow, growth. There is no doubt that the decision by the UAE to leave OPEC in May of this year would have a successful international light crude marker in the menu of its reasoning. However, and invoking the Scottish poet Robert Burns on how the “best laid schemes of mice and men”, often go awry, none had reckoned with the misadventure now unfolding in the seas and lands of Arabia.

Murban might have had the ability to be loaded at Fujairah and by doing so circumvent the pinch of Hormuz, but its pricing regime requires settlement some 2 months before any oil is loaded for delivery. As the Financial Times neatly explains, this made for “a substantial security-of-supply premium but that premium was then embedded in the prices of cargoes loading weeks later, after the situation had changed, prompting complaints from buyers.” Liquidity disappeared, price moves were even more exaggerated than that of the ‘big dog’ futures of WTI and Brent of which it was trying to compete, and the contract could only be traded around the pricing times of the Singapore window or settlement. Murban will now revert to using front-month Dubai Platts pricing and OSPs will be announced in the preceding month to which cargoes load. 

ADNOC had been considering taking the Upper Zakum grade on the same path that it had set for Murban, but that has been abandoned now. Indeed, there is no hanging around in decision, IFAD told Reuters, it will continue trading for Murban crude futures contract months that have open interest while those without will be suspended from Friday. An ICE spokesperson did not immediately reply to a question (from Reuters) about what would happen after, but it will not take any more nails for this coffin to be closed. Whatever good will the UAE might have had with its neighbours, it was zeroed with the decision to leave OPEC. The Emirate cannot then expect any aid from its former cartel members in its quest to find an alternative to some of the arguably arbitrary pricing that comes from OSP relationships. Any sort of market blow such as this should be mourned, the more exposure there is via new modes of trading brings extra exposure and liquidity in equal bundles. It seems that the casualties of this war go beyond those of a physical nature. There will be more. 
 

Overnight Pricing