Oil exchanges play a pivotal role in modernizing the energy market by ensuring clarity in royalties and taxes, smooth trading and transparent market pricing for crude oil. For oil-producing nations, exchanges provide a mechanism to align prices with market conditions, streamlining sales and stabilizing revenue streams. Beyond their transactional role, exchanges carry strategic significance, offering oil producers options to adapt or innovate in response to market constraints. Ultimately, merging one or more of the Middle East exchanges and expanding their capabilities could even lead to an ultimate crude oil benchmark.
The UAE and Oman’s Strategic Market Positions
As a member of Opec, the United Arab Emirates produces around 3 million barrels per day but has the capacity for 4.5 million b/d and is planning for 5 million b/d by 2027. Opec quotas and voluntary production cuts restrict this potential, but the UAE is uniquely positioned to bypass such constraints. ICE Futures Abu Dhabi (IFAD), its oil exchange created in cooperation with the Intercontinental Exchange (ICE), is a guarantor that the country could instantly sell additional oil at market prices if it ever decided to operate independently of Opec. The exchange is not just a matter of national pride and some vain quest for an illusory Middle East benchmark traded electronically in the region, but a strategic instrument that can ensure continued crude oil exports under extreme market circumstances.
Similarly, Oman’s oil production is generally channeled through its futures contract based on physical delivery at the Dubai Mercantile Exchange (DME), a joint venture with the Chicago Mercantile Exchange, a contract that has been trading since 2007.
In contrast, other Opec members like Saudi Arabia face operational challenges in managing excess supply. When Saudi Arabia flooded the market in April 2020, logistical issues arose, requiring additional shipping and storage capacity while searching for buyers — a complex and expensive process. The UAE’s exchange mitigates such risks by automatically matching supply with demand at market prices, simplifying operations and enhancing efficiency.
Saudi Arabia’s Evolving Exchange Strategy
Recognizing the strategic value of oil exchanges, Saudi Arabia appears to be positioning itself to benefit from similar capabilities. In January 2024, Tadawul Group, the Saudi stock exchange operator, acquired a 32.6% stake in the parent company of the DME, home to the Oman crude oil contract. While Tadawul assured that Saudi crude would not be traded or indexed on the DME to avoid conflicts of interest, this acquisition potentially opens doors for future innovations, such as the creation of new contracts for hydrocarbons like condensates.
Condensates — ultra-light hydrocarbons with significant production volumes in the Middle East — lack a dedicated benchmark. With over 20 million b/d of global condensate production, mainly consumed in Asia, a Middle Eastern condensate contract could fill a major market gap, particularly as Qatar’s gas expansion is expected to boost associated condensate output.
Could a Mideast Contract Become a Global Benchmark?
The possibility of a Middle Eastern oil contract evolving into a global benchmark has been hotly debated for years. While some analysts believe contracts like IFAD’s Murban could rival Brent or West Texas Intermediate (WTI), significant hurdles remain. As an Opec member, the UAE’s Murban crude faces inherent limitations tied to production quotas. Furthermore, with the trading arm of Abu Dhabi National Oil Co. actively participating in Murban trading and the company’s Ruwais refinery processing much of the crude, the Murban contract does not exhibit the independence or liquidity necessary to achieve global benchmark status.
A key challenge for the existing Middle Eastern contracts is the lack of alternative deliverable grades. Benchmarks like Brent and Dubai allow multiple crudes to be delivered against their contracts, stabilizing prices and discouraging market manipulation. For example, Brent includes Forties, Oseberg, Ekofisk, Troll and Midland WTI, while Dubai incorporates Upper Zakum, Al Shaheen, Oman and Murban. These options prevent price spikes caused by short squeezes, ensuring greater market stability.
To illustrate, the introduction of alternative delivery grades saved the WTI benchmark in the 1980s when falling US crude production led to liquidity issues. Allowing foreign grades like Brent and Bonny Light to be delivered into the WTI contract revitalized the market, increasing participation and boosting liquidity. A similar approach could transform a Middle Eastern contract into a globally recognized benchmark by increasing flexibility and reducing volatility.
Hypothetical Middle Eastern Benchmark
Imagine a Middle Eastern contract incorporating 8 million b/d of deliverable crude grades such as Oman, Upper Zakum, Arab Light and Iranian Light. These crudes are relatively similar in quality, making them interchangeable for refinery use. Such a contract, financially settled like Brent or Dubai, could become the foundation for the world’s leading benchmark. However, political complexities in the region make this scenario unlikely in the near future.
For now, existing benchmarks like the Platts Dubai contract remain dominant due to their liquidity and reliability. Nevertheless, the idea of a highly liquid Middle Eastern benchmark is not far-fetched and could materialize under favorable conditions.
China’s Shanghai International Energy Exchange
At the other end of the spectrum lies the Shanghai International Energy Exchange (INE) with its medium, sour crude oil contract (SC). Launched in 2018 and traded in Chinese renminbi, the SC contract exemplifies the multiple-grade delivery mechanism, including grades like Murban, Upper Zakum, Dubai, Oman, Basrah Light and Brazil’s Tupi.
Despite its innovative structure, the SC contract has not succeeded as a price discovery tool. Deliveries are limited, averaging only a few million barrels per month, dominated by grades like Basrah Light and Upper Zakum. Instead, the contract serves primarily as a speculative financial instrument, popular among retail and financial investors.
In June 2021, the introduction of crude oil options boosted trading volumes, making INE the third-largest oil exchange globally after ICE and CME. However, due to Chinese government regulations and industrial policies, the SC contract is unlikely to gain international status. Still, it has potential to grow as a delivery mechanism for independent refiners, particularly if favurable policies are implemented.
The Future of Oil Exchanges
As global energy markets evolve, oil exchanges are becoming increasingly important for price transparency, liquidity and strategic flexibility. The Middle East, as a leading oil-producing region, has opportunities to enhance its influence through exchange-based benchmarks. While challenges remain, including political dynamics and market structures, the potential for innovation is immense.
From the UAE’s strategic use of its exchange to Saudi Arabia’s calculated investments in DME and China’s ambitious INE contract, oil exchanges are reshaping how crude is traded and valued. Whether a Middle Eastern benchmark emerges to rival Brent and WTI or regional contracts remain localized tools, the role of exchanges will only grow in significance as producers and consumers navigate the complexities of the global oil market.