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Abu Dhabi is overhauling the way it sells its oil, retreating from an ambition to establish its own global crude benchmark to rival Brent after the Iran war exposed flaws in the fledgling market.
Adnoc, the emirate’s national oil company, said on Friday that it would stop selling its flagship grade of crude, Murban, on an open market and would instead revert to a previous system of quotas whose price is linked to benchmarks assessed in Dubai.
Five years ago, the capital of the United Arab Emirates shook up the traditionally conservative Gulf oil trade by announcing that Murban crude would be priced through a futures contract on a new exchange, ICE Futures Abu Dhabi.
Sultan al-Jaber, Adnoc chief executive, said it was a “historic moment” that would allow customers to “better price, manage and trade their purchases of Murban”.
Big producers in the Gulf, such as Saudi Arabia, sell most of their crude on long-term contracts, setting monthly prices at a premium or discount to established regional benchmarks such as Dubai.
Abu Dhabi instead made Murban freely tradeable and sought to build a new benchmark that it hoped would eventually stand alongside Brent, which prices much of the world’s oil, and West Texas Intermediate, the principal US marker.
The ambition took on more weight earlier this year when the UAE said it would leave the oil producers group Opec, a move that could allow it to raise its oil production to over 5mn barrels a day by next year.
But on Friday, Adnoc said that from November it would abandon Murban futures as the basis for its official selling prices and return to the previous system, following what it described as a “regular commercial review”.
The decision threatens the future of the Abu Dhabi exchange, according to market participants. “Totally finished,” said one crude trading specialist. “It takes a lot to kill one’s own creation. You need to have a lot of backbone.”
The extreme volatility in oil markets caused by the Iran war exposed a fundamental timing problem with the Murban futures contract, which is settled roughly two months before oil is loaded, giving buyers time to arrange shipping, financing and collection of their cargoes.
When Iranian pressure closed the Strait of Hormuz to commercial shipping, Murban surged because it is exported from Fujairah, outside the strait, giving it 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.
Ben Jackson, the president of Intercontinental Exchange, said on Thursday that the exchange had already seen a shift away from trading Murban futures in Abu Dhabi to “our more liquid Dubai contract”, which is settled in cash.
“Dubai, which prices a basket of Middle East grades, is growing into the key cash-settled benchmark for the region,” he said. “We believe that this consolidation of liquidity into one regional Middle East marker may be a result of a permanent shift.”
