The island of excellence emerging around Murban futures

How the groundwork is being laid for the Middle Eastern benchmark crude truly to go global

Adnoc is the main supplier of natural gas to industries in the UAE and accounts for over two-thirds of supply. Courtesy: Adnoc

World markets for stocks and commodities have continued trading – with remarkable aplomb – through the pandemic, and new markets have even been created during Covid-19.

It feels like an epoch since the exciting announcement of November 11, 2019 by the Atlanta-based InterContinental Exchange (ICE), partnering with Adnoc and nine leading energy companies to create a new exchange, ICE Futures Abu Dhabi (IFAD), at Abu Dhabi Global Markets. The aim is to make Murban a key traded benchmark building on its existing pivotal importance for Gulf oil pricing.

Deploying the liquidity, accessibility and transparency that modern electronic markets deliver, ADGM signalled it was open for business, leading a series of other leading regulators to swiftly recognise the platform before launch.

Only 504 days later, IFAD was launched. Building such a platform from scratch would be tough at the best of times. Given coronavirus travel restrictions, the smooth launch was all the more remarkable. Launching a new futures exchange in such a turbulent situation as Covid-19 has made IFAD unique. Simultaneously launching 19 futures contracts was a remarkable feat for a brand new market in any circumstances.

Back in the early 1980s when most people gained oil market "insights" from watching the glossy television soap opera “Dallas”, the New York Mercantile Exchange launched West Texas Intermediate (WTI) futures. Analogue-era exchanges were cosy clubs whose members populated exchange pits wearing coloured jackets. Shouting blended with hand signals drove commodity market transactions. Floor trading was expensive but remarkably efficient. The real estate and personnel required for each pit meant that benchmarks tended to be decided by first mover advantage and a broad ability to be used by hedgers and speculators, even if they were somewhat approximate for much of the market. Thus WTI and Brent Crude became the globally accepted oil futures, not particularly because their differing but still relatively light sweet crude characteristics neatly reflect the world’s major oil reserves. Shared political stability in the US and UK during the late Cold War era 1980s helped the New York and London futures markets sustain energy benchmark status.

With electronic markets becoming nearly ubiquitous in the new millennium, the costs of operating individual futures contracts collapsed. Previously, multiple traders congregated in a pit could focus on nothing else. Computerised markets allowed office traders to have banks of screens enabling simultaneous trading across a myriad of markets. Computer algorithms could further assist liquidity providers and arbitrageurs alike. Fuelled by electronic networks and the opening of post-Soviet economies, participants sought out more granular benchmarks. Whereas previously the brace of transatlantic futures were the proxy for global oil, now new energy contracts were launched from Dubai to St Petersburg including natural gas such as JKM, the Japan Korea Marker.

Nevertheless, a highly liquid, internationally popular Middle Eastern benchmark continued to elude futures markets. Filling this relative vacuum was a driving factor behind IFAD with an open Murban epicentre, neatly linking the ADNOC IFAD JV. into the global ICE network: exchanges in Atlanta, London, Amsterdam and Singapore trading products contiguous to Murban, including the market leading billion barrel per day ICE Brent Crude futures.

The process of growing liquidity in any new futures exchanges is often a lengthy labour of love. Nurturing new contracts is akin to garden cultivation: it takes time to turn even the best saplings into strong oak trees. Take the launch of Brent Crude futures on the then International Petroleum Exchange (IPE).

There was palpable excitement across the City of London when the St Katherine docks' pits roared into action on Thursday June 23, 1988. An impressive 624 Brent contracts were traded on that first day of trading. Less than a year later, traded options debuted with an even higher 719 Brent Options trading. By then Brent futures trading was already averaging a spectacular 7500 contracts per day.

Fast forward 33 years: Murban futures debuted on the new IFAD on March 29th with 8854 traded across the Murban complex (6,344 ICE Murban futures, 2,510 cash settled derivatives). By April 7, this volume had grown to a daily record of 14,419 contracts, despite the Easter long weekend curtailing trading interest across several continents. By week three, this record was broken when 16,305 contracts were traded on one day, and by week four this record was again beaten when 18,848 contracts traded on IFAD in a single day on April 20.

From this stunning debut, it would be easy to take the repetition of volume records for granted. Rather, Murban futures are in unprecedented territory. Already, traded volumes resemble a decent two to three-year-old contract despite only a few weeks elapsing since launch. Strong growth in volumes and counterparties is evident. Usually it takes months and years to convince new traders of the merits of a futures contract – Murban was born with dozens of eager traders from amongst the world’s major energy companies. Again this is unprecedented.

By comparison another major US-based exchange recently launched markets in Californian water and cheese which have been averaging between 60-400 contracts per day respectively. Don’t count those as disasters, they are new and growing "normally". Rather, marvel at IFAD where the new sensation Murban is demonstrating a seemingly inevitable trajectory towards becoming the world’s third benchmark oil market sandwiched elegantly between WTI and Brent. IFAD trading over a hundred million barrels of Murban in its first month is unprecedented.

In the heart of ADGM, an island of excellence is emerging around Murban futures at IFAD.

Patrick L Young is a former exchange chief executive and author of the daily newsletter 'Exchange Invest', along with 'Victory or Death: Blockchain, Cryptocurrency and the FinTech World