SINGAPORE - A delivery margin requirement under ICE Clear Europe for the newly launched Murban crude futures contract could make it more costly for buyers to take physical oil delivery on the exchange, industry sources said on Tuesday.

Buyers have to pay the exchange the full contract value of a cargo three days before the start of its pre-agreed delivery window, the sources said.

ICE also requires payment in cash or collateral such as government bonds or gold, according to its website, unlike the Dubai Mercantile Exchange where traders can use letters of credit (LCs).

The amount will be credited to the seller in cash, 30 days after the bill of lading or when the cargo is loaded.

Traders said the financing cost for cash transactions could add as much as 20 to 30 cents per barrel for buyers, depending on their financing costs and loading dates, versus a few cents per barrel for LCs.

The forms of collateral approved by ICE are also not typically held by trading firms, they added.

"Physical delivery isn't the best ending for anyone, only if it's cheap enough," a trader with a North Asian refiner said.

The Murban contract prices the flagship Abu Dhabi grade that accounts for more than half of ADNOC's oil production. It is a physically delivered contract, with delivery at Fujairah in the United Arab Emirates on a free-on-board (FOB) basis.  

The contract is traded on the ICE Futures Abu Dhabi (IFAD) oil exchange, backed by the Intercontinental Exchange Inc, Abu Dhabi National Oil Co (ADNOC) and partners including international oil producers.

The clearing of Murban futures on ICE Clear Europe "creates significant margin offsets for our customers and provides an extremely capital efficient way for the energy market to trade Murban", an ICE spokesman told Reuters.

The clearing house is regulated by the European Market Infrastructure Regulation (EMIR), a European Union law aimed at reducing risks posed to the financial system by derivatives transactions.

Counterparties can also use Alternative Delivery Procedures (ADP) to settle deals outside the exchange, such as privately agreeing to an exchange of futures for physical (EFP) at a certain price, the sources said.

The cost of EFPs has yet to be set by the industry, although some sources believe sellers are likely to ask for premiums as they are aware of the capital costs involved for buyers.

 

(Reporting by Florence Tan; editing by Jason Neely) ((Florence.Tan@thomsonreuters.com; Reuters Messaging: florence.tan.thomsonreuters.com@reuters.net))