Abu Dhabi attempts fundamental change on how Middle East oil is sold; hits opposition

Abu Dhabi will make an aggressive change as it starts selling futures contracts for its oil and then shipping the barrels from Fujairah. It aspires to alter the pricing of about one-fifth of the world's oil. Nearly 20 million barrels of oil are produced daily in the Persian Gulf, and Abu Dhabi wants the future for its flagship Murban grade to become the region's main benchmark.

Revolution begins on how the Middle East oil is sold

Saudi Arabia, Iraq, and the United Arab Emirates, whose capital is Abu Dhabi, have historically priced their barrels using benchmarks from other areas. They have often sold their oil to refineries or foreign firms with stakes in their fields. They have also stopped some consumers from reselling the oil and taking advantage of energy market arbitrage opportunities.

Abu Dhabi is now lifting those limits in order to make its oil available to both financial and physical traders. Investors all over the world are flocking to commodities because of their high yields compared to other assets and to hedge against inflation. Murban will be piped to Fujairah, where Abu Dhabi's desert fields physically interact with global markets, once it has been sold on an exchange.

Oil traders against change, create a stir

However, it will be difficult to establish a new standard. Oil traders are averse to change, particularly when they think markets are already doing a good job of balancing supply and demand. After announcing that it would reform Dated Brent, the world's largest oil price index, S&P Global Platts, created a stir this year. It had no choice but to put the plan on hold indefinitely.

According to Hari of Vanda Insights, the Murban trade and capacity boost could exacerbate tensions within the Organization of Petroleum Exporting Countries. The cartel is governed by Gulf states, which respect unity. Last year, as the coronavirus pandemic spread, they started unprecedented production cuts to support prices.

(Picture Credit: AP)