Oil traders are expected to square out positions held in Murban crude futures contracts on the ICE Futures Abu Dhabi (IFAD) exchange after the Abu Dhabi National Oil Company said it would change its pricing mechanism, numerous trade sources said.
The move comes after the Iran war disrupted oil exports from the Middle East through the key Strait of Hormuz waterway and caused deep hedging losses among traders who deal with Abu Dhabi oil, traders have said.
The change takes effect from November 1, after the United Arab Emirates producer said last week it would switch to prompt-month Platts Dubai pricing to benchmark monthly official selling prices (OSPs) of all its crude grades, instead of Murban crude futures.
The change, covering Abu Dhabi onshore and offshore crude grades such as Murban, Das, Umm Lulu and Upper Zakum, will align ADNOC's OSPs more closely with the month of loading, the company said.
ADNOC will announce differentials to Dubai quotes a month before cargo loadings.
The UAE left the Organisation of the Petroleum Exporting Countries in May after nearly 60 years and plans to expand production to five million barrels per day.
Since the Murban futures contract was established five years ago amid fanfare, traders have used it mainly to hedge exposure to ADNOC's OSPs, but the risk management tool will no longer be relevant under the new methodology, traders say.
"The recurrent closure of the Strait of Hormuz and general cautiousness by sellers and their buyers plus sudden changes in pricing methodologies has prompted a need for change in OSP formulas and spot selling practices," said Jorge Montepeque, managing director of Onyx Capital Group.
The IFAD exchange was set up to provide transparency and pave the way for ADNOC's flagship Murban crude to become a global benchmark.
"ADNOC gave up the benchmark but chose a stable outlet to cope with their production growth," a trader at a major North Asian refinery said on condition of anonymity, referring to long-term contracts with Asian refiners.
Traders are likely to switch to derivatives such as Dubai and Brent futures on ICE or dated Brent for hedging, trading sources said.
Three Chinese refining sources said the change would have little impact on oil procurement. ICE did not respond to a question on the future of the Abu Dhabi exchange.
IFAD said it will continue trading for Murban crude futures contract months that have open interest, while those without were suspended from last Friday.
Open interest for the September contract is the highest, at about 26,689 lots by July 31, versus a record 28,548 lots set by the May contract in March. Each lot is 1,000 barrels.
There are also open interests for monthly contracts from November to next March.
ADNOC declined to say how differentials will be set for each grade under the new OSPs.
"The updated methodology remains transparent, rules-based and built on publicly available market references," an ADNOC spokesperson said by email.
(Reporting by Florence Tan and Siyi Liu; Editing by Tony Munroe and Clarence Fernandez)
