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Fuel Traders put Faith in UAE as Fourth Trading Hub | ASHARQ AL-AWSAT English Archive 2005 -2017
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SINGAPORE/DUBAI (Reuters) – The United Arab Emirates is well on its way to becoming the world’s fourth major fuel trading hub, making the region as important a swing factor in gasoline and diesel markets as it has long been for crude.

Its growth as a center of physical trading remains embryonic: liquidity is still too thin and diffuse to create benchmark prices; access to storage facilities is still largely limited to the owners; and hoped-for local futures and derivatives contracts for oil products have yet to be launched.

Yet many say it is only a matter of time, with many firms expanding their presence in anticipation of short-term shortages and longer-term surpluses that will make for profitable trade.

“The Gulf market is becoming increasingly important as many of the states are substantially short on key products, especially diesel and gasoline,” said David Kirsch, director of market intelligence services at PFC Energy in Washington.

The burgeoning area, which has been on a long drive to become the region’s trade center, must first prove to a critical mass of traders that it can be as obliging a host as existing hubs.

Open access to a range of port and storage facilities, plus a largely hands-off approach from government, have helped Singapore, Houston and the Amsterdam-Rotterdam-Antwerp (ARA) area to flourish as the main hubs for global oil products trade.

While the precedent for trading oil for profit in the region is far from reassuring, there are reasons to be hopeful.

Most of the region’s big producers, including Saudi Arabia, Iran and Kuwait effectively ban customers from trading their crude. But they take a far more lenient view of refined fuels like gasoline and diesel, for which import demand has risen as a petrodollar revenue boom has fueled strong consumption growth.

The Middle East will use 7.2 million barrels per day (bpd) this year, the International Energy Agency (IEA) says, nearly as much as No. 2 energy user China despite having under half as many people. The IEA expects the region’s demand to grow 2.5 percent, while consumption falls in almost every region, including China.

Longer-term, that trend is likely to be reversed: massive refinery expansion projects look set to give the Gulf a significant surplus of refined fuels by 2015, an equally compelling proposition for oil traders looking to make a market.

“Dubai is becoming a center for trading,” said Saeed Khoory, group CEO for Emirates National Oil Co. “In time it will be an important place for trading of oil, physical and paper.”


The region has a number of sizeable oil storage facilities, a requisite for the efficient trading and pricing of oil products.

Storage capacity in Fujairah, already the world’s No. 3 ship refueling hub, is estimated at 2.5-3.0 million cu m, and future expansions could raise it to up to 6.5-7.0 million cu m, sources said. At Jebel Ali, another export terminal, storage is estimated at more than 1 million cu m.

The region has strong local demand that will drive specific markets: air travel is surging and local fleets are expanding. The opportunities are big enough to have encouraged traders, though the financial crisis has sapped some appetite for risk.

“I think it’s already developing pretty fast and pretty well,” said Ian Taylor, chief executive of oil trader Vitol, which is expanding its storage capacity in Fujairah to nearly 1.1 million cu m after buying an aging refinery there.

Morgan Stanley more than tripled its leased storage in the region to over 1.5 million barrels this year, while in the last 1-½ years, U.S. oil firm ConocoPhillips and a unit of Thailand’s have joined the likes of Vitol, BP and Lukoil to open Gulf trading outposts.

The NYMEX-backed Dubai Mercantile Exchange (DME) launched its Oman futures contract in June 2007 in a bid to establish a new Middle East crude benchmark, but has for now shelved plans for a jet fuel contract.


While regional demand has been an important driver so far, it is being eclipsed by the excess of supply that is emerging, particularly with a global recession closing off other markets.

Reliance’s newly expanded Jamnagar refining complex is the world’s largest at 1.24 million bpd, and the expansion of state refineries is set to lift India’s fuel exports to over 1.4 million bpd by 2012, overtaking Singapore’s total, FACTS said.

Much of that will head toward the Middle East, for consumption or for storage and trading.

The Gulf is also investing heavily in new refineries that could swing the region’s balance from imports to exports.

Saudi Arabia is expected to fire up in 2012-2013 two new 400,000-bpd export-oriented joint-venture plants; the UAE, Qatar, Kuwait and Iran also have plans for more refining capacity.

Middle East oil product output is set to rise 16 percent to 9.6 million bpd in 2012 from this year, taking net exports to 3.1 million bpd then from 2.6 million bpd now, FACTS estimates.

“Economies of scale will play a crucial role here as the refinery sizes are huge, which will imply that large volumes of crude and products will be traded,” said Praveen Kumar, a consultant at FACTS Global in Singapore.


With the supply/demand structure and physical facilities in place or planned, one of the last hurdles the UAE and the region have to clear is to establish independent oil product pricing.

“The real novelty… is not physical infrastructure, but rather the tradition of price setting and placing hubs in key consumption areas,” said PFC’s Kirsch.

Pricing agency Platts now sets benchmark Middle East prices as a “netback” to Singapore’s, essentially subtracting the cost of freight from the Asian benchmark, a system that has the edge of a relatively liquid basis price but does little to account for Gulf-specific fundamentals or flows.

It will take far greater spot market liquidity to establish independent prices, but the process appears well under way.

“The economic situation has slowed the process, but it will happen,” said Jorge Montepeque, Platts’ global director of oil markets. “It’s growing and there is more entrepot trade, more shortages and surpluses. Imbalances will create vibrant trade.”