Infographic: One year on, Murban futures contract struggles to boost liquidity, attract financial players

One year since its launch, the Murban crude futures contract has gained a foothold in the regional market but is still struggling to gain liquidity and attract enough financial players to become the benchmark envisioned by Abu Dhabi and the Intercontinental Exchange.

Trading volumes remain relatively low even though the number of participants has more than tripled to 97 since its launch on March 29, 2021, according to ICE Futures Abu Dhabi, the exchange set up in the UAE capital to host the Murban contract.

Traders say the contract suffers from volatility due to low liquidity and physical delivery issues.

IFAD, however, says it remains encouraged by the start of trading of the Murban futures contract, which is underpinned by Abu Dhabi National Oil Co.'s flagship grade, and that it is still very early days for the contract.

"Financial participants already form a proportion of our customer base, but we continue to market Murban to both the physical community that has Murban exposure to manage and the financial community that trades ICE's other oil markets," IFAD president Jamal Oulhadj said in written responses to questions from S&P Global Commodity Insights.

Since its launch, the Murban futures contract has traded more than 1.4 billion barrels of crude and delivered some 80.7 million barrels, according to ICE.

This compares favorably with the Dubai Mercantile Exchange, the first platform to trade a futures crude contract in the Gulf region -- based on Oman's export grade -- when it was launched in 2007. The DME had over 70 participants and traded more than 350 million barrels of crude in its first year, according to its website.

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Volatility of liquidity

However, liquidity of the Murban contract remains low, compared to global benchmarks.

Murban's highest trading volume was 20,124 on July 6, 2021 compared with ICE Brent's 2,154,656 reached on Feb. 24 during the one-year period from March 29, 2021.

Asian traders, the primary customers of Murban crude, also continue to be worried about the contract's liquidity.

As the front-month contract nears expiry each month and open positions in the contract are closed, this can lead to lower liquidity which in turn can trigger volatility in the price.

"I think it's not bad," a trader with a Japanese trading house told S&P Global. "There's a little problem with end-month liquidity."

Another crude oil trader with an Indian refinery also mentioned how front-month liquidity remains a major concern.

"For me, IFAD is similar to DME essentially," said a trader with a Southeast Asian refinery, comparing the Murban and Oman futures contracts.

Alternative physical delivery

Physical delivery of Murban cargoes is an area that has scope for improvement, with the upfront payment clause for cargoes a concern for some buyers, the trader with the Japanese trading house said.

ADNOC and IFAD could address the physical delivery concerns by allowing the supply of alternative crude grades, a move that can improve liquidity and attract financial players, said Adi Imsirovic, senior research fellow with the Oxford Institute for Energy Studies.

"What they need to do is focus on the basics, [like] does the contract work and whether physical delivery is smooth. [The] physical delivery with the DME was not smooth. With Murban, it's a lot better, but Murban physical delivery is too expensive," said Imsirovic.

"The so-called futures traders usually come from the US and further, and these guys like liquidity. They will come to a contract once you get liquidity so it's a bit of a catch-22. So, in the meantime they will always rather trade WTI and Brent because they get in and get out and settle."

Allowing alternative delivery of crudes -- whether from the UAE, regionally or internationally -- will also help increase the depth of trading on IFAD and attract traders other than equity holders.

Imsirovic said IFAD should look to the NYMEX crude and ICE Brent contracts that allow other grades to be delivered against the contract.

Low risk

Despite the liquidity concerns, several traders said they consider IFAD as a reliable option and expect it to improve with time, particularly in light of ongoing volatility spurred by the Russia-Ukraine war and difficulties in the financing of cargo purchases.

Given IFAD's reputation, buyers can easily arrange finance with very low risk, one trader said.

"Given the market situation, the LC [letter of credit] and credit risk, IFAD is very safe," a trader said, adding that the contract "looks good in this current situation."

Moreover, ADNOC issues its monthly official selling prices for its three other grades based on the Murban futures contract, making it even more indispensable for regional refiners.

"You can see some traders trading inside IFAD quite actively, so that all makes ADNOC grades more active and tradeable," a trader with a North Asian refinery said.

Benchmark Platts Dubai published by S&P Global remains crucial given the preference for medium, sour grades among most Asian refiners, particularly since it is a basket of crudes that provides flexibility and covers a whole range of the Middle East market, some traders said.

Given that Murban remains ADNOC's flagship grade and is sought by Asian refiners, the presence of the IFAD is a key driving force for light, sour crudes, traders added.

Last year's infographic: New Murban futures contract adds to Middle East trading options