Make Room, West Texas Intermediate and Brent. Murban Is Here. - Bloomberg

Make Room, West Texas Intermediate and Brent. Murban Is Here. - Bloomberg

On March 29, Saudi Arabia’s control over Mideast oil supply could be loosened, possibly forever. On that day, traders on the Intercontinental Exchange (ICE) will begin buying and selling a futures contract based on Murban crude oil, which is produced by Abu Dhabi National Oil Co. Anyone who buys Murban oil will be able to sell it anywhere in the world, as they already can with West Texas Intermediate crude from the U.S. and Brent crude from Britain’s North Sea. The difference is that Murban volumes are much larger than those of the American and British crudes. The lack of destination controls will set Abu Dhabi apart from Saudi Arabia, which zealously controls who can buy and consume each shipment of its oil.

“Sooner or later, the action could weaken OPEC and the Coalition,” namely, oil-exporting countries that coordinate with OPEC, energy economist Philip Verleger of PKVerleger LLC writes in the March 8 issue of his newsletter, Notes at the Margin. “Their ability to sustain prices will be broken.”

Abu Dhabi, part of the United Arab Emirates, has chafed at the Saudis’ attempts to prop up prices by limiting production (which, of course, is what cartels live to do). Its production quota relative to capacity is lower than the Saudis’. “The UAE is increasingly willing to act in its own direct national interests, and where that doesn’t align with Saudi Arabia it’s confident and willing to go it alone,” Neil Quilliam, associate fellow in the Middle East and North Africa program at the Chatham House think tank, told Bloomberg in December.

The Murban futures contract is the sharpest break yet. The Saudis maximize profits by selling to customers at different prices, depending on local conditions, and prohibiting resale. Murban undercuts that strategy. Because of the volumes of oil involved and the freedom with which the contracts can be traded, Murban is likely to outshine WTI and Brent and become the world’s most important oil price benchmark, says Verleger. Conveniently, the delivery point for Murban is in the port city of Fujairah, which lies outside of the Strait of Hormuz, a notorious chokepoint.

Julian Lee, an oil strategist for Bloomberg First Word, wrote March 14, “It doesn’t seem much, but the most damaging leaks often don’t. The Organization of Petroleum Exporting Countries has suffered a small crack that could grow to into a rift big enough to sink it.”

Verleger, in a March 14 email, wrote that his research over four decades shows that futures markets break cartels. “What it points to is a divorce between the UAE and the Saudis and lower oil prices--for a long time,” he wrote.