On June 30, the August ICE Murban Crude Oil Futures Contract (contract code “ADM”) (the “Murban Futures Contract”) expired and shortly after, the Murban Crude Oil Official Selling Price (“OSP”), calculated by the Abu Dhabi National Oil Company (ADNOC) for oil loading in August was published. How does this work and what happens?
The Murban Futures Contract is a physically delivered futures contract traded on ICE Futures Abu Dhabi (“IFAD”). The so-called “front-month” contract expires two months ahead. Going to expiry means that the “paper” contracts begin the process to become “wet” cargoes, which are physically delivered from the seller to the buyer.
The first Murban Futures Contract to expire was the June contract month, with 5,110 contracts going to expiry on April 30. On May 28, the July contract month expired with 6,079 contracts going to expiry for delivery in July, and on June 30 the August contract expired with 6,923 contracts expiring.
Average daily volume in the Murban Futures Contract was 6,625 contracts during April, 7,452 contracts in May, and 6,775 in June. By July, 64 different participants were active on IFAD with a range of refiners, producers, traders (referred to as physical players) and financial participants trading on screen.
ICE Murban Weekly Volume and Open Interest
Recent major announcements in the Middle East crude market include ADNOC’s decision to move its OSP for its Murban crude export sales to forward-looking pricing based on the Murban Futures Contract price. ADNOC also announced that its other grades Upper Zakum, Umm Lulu and Das would price as a differential to the Murban OSP; and that it would lift destination restrictions on all its crude grades from June 2021, which was the first delivery month for the Murban Futures Contract traded on IFAD.
ADNOC’s OSP is the arithmetic average of all the Singapore Marker prices set during the month of the Murban Futures Contract. ADNOC’s August OSP for Murban is $72.34 a barrel. This currently sets the price for approximately 2.6 million barrels of oil per day (“mbpd”) as ADNOC has the capacity to produce up to 2mbpd of Murban crude and is also pricing its other crude grades, Upper Zakum, Das and Umm Lulu, at a differential to the OSP.
Approximately 95% of the Singapore Marker Prices used to set the Murban OSP will have been established by the expiry date of the Murban Futures Contract.
The price at which the Murban Futures Contracts go to physical delivery is based on the Exchange Delivery Settlement Price (“EDSP”). This is equivalent to the Singapore Marker Price determined on the expiry day. After that point, the front month contract is no longer available for trading. For example, on June 30 after 16:30 Singapore Prevailing Time (“SPT”), the September 2021 futures contract became the next “front-month” for Murban crude deliveries in September.
There are a few characteristics which the market tends to witness in the lead up to and on the expiry day of physically delivered commodities such as Murban:
1. a drop in open interest as expiry day approaches. Market participants who do not want to make or take physical delivery of Murban crude close out their position in the front month; some may maintain long or short exposure by “rolling” their position to the next month;
2. there tends to be a convergence of the futures price to the spot physical price on expiry day. This convergence is an important characteristic of how a futures market is closely correlated with the underlying physical asset and helps give traders confidence to use the futures contract for hedging; and
3. as it is typically only physical market participants remaining active in the market on expiry day, trading volumes tend to be lower as a result of the two factors described above. These characteristics are familiar occurrences with ICE Low Sulphur Gasoil, the global benchmark for refined products and another physically delivered futures contract.
Following very close engagement with customers and the oil market, the design of the Murban Futures Contract is closely modelled on the ICE Low Sulphur Gasoil Futures Contract and the clearing and delivery process is as aligned as possible with the established Murban OTC delivery processes and timelines.
IFAD publishes two marker prices daily - the Murban Crude Oil Singapore Marker and the Murban Crude Oil London Marker. Each of these allows market participants to manage their price risk by referencing an official marker price set at 16:30 Singapore Time or 16:30 London Time, both of which are important pricing points for many other crude oils and refined products.
Both Marker prices represent a volume weighted average of trades conducted on the ICE central limit order book in the one minute preceding the marker time of 16:30.
When assessing the volume of trades conducted during the one minute, it is worth comparing this to the broader trading behavior which occurs in the Murban Futures Contract during the trading day and during the month. Depth of liquidity through the day is critical for buyers and sellers who want to contribute to and benefit from two-way markets at whatever time of the day they choose to trade.
Both the Singapore and London Markers are calculated and published for the front four Murban Futures Contract months.