Dubai fast emerging as Asia's fuel trading hub

Dubai is emerging as one of Asia's key trading hub of refined crude products, analysts said. However, the emirate needs to improve on certain platforms before the market officially awards it the coveted position, traders said.

Firstly, Dubai must ensure that traders selling refined products from the region register their sale. Secondly, pricing of fuels (refined products) should be carried out by an entity based in the region. And thirdly, even though storage capacity expansions are taking place in at least two emirates, there is still space for new storage capacity of refined products such as petrol, diesel and jet fuel.

"These issues remain the key to establishing Dubai as a trading hub," said Owain Johnson, a senior official with Argus, the world's largest energy analysis and reporting agency.

As of now most of the region's oil – crude and refined products – are traded in Singapore, a tiny country with no reserves but with a deeply entrenched systematic fuel trade, he said.

The GCC, as one entity, is the largest exporter of crude in the world. With the two-year-old Dubai Oman Futures Contract doing pretty well, Dubai has emerged as a prominent centre of crude sale. Since the region imports most of its refined products, and Dubai is the region's import hub, it is also the Middle East's largest market for refined products such as jet fuel, petrol and diesel.

"As of now most of the crude from the region is traded directly by national oil companies (NOCs). Even though there is some presence of traders in Dubai, the NOCs sell most of their oil directly to buyers. And much of the date about those sales is not published," Johnson said.

A mechanism to calculate the daily trade of crude and refined products from the region is yet to evolve, Johnson said, while emphasising Dubai needs to move in to fill the gap.

"We see some difficulties with pricing mechanisms in the Gulf because the region is becoming an important standalone import/ export centre, yet its pricing arrangements are all dependent on Singapore or Rotterdam pricing. We are keen to encourage the development of standalone Middle East products' pricing. If Middle East pricing becomes a reality, then trade could certainly pick up. We need more information on trade from the region," he added.

Johnson, who specialises in refined crude trade, said he sees Dubai emerging on top of a second tier of fuel trade hubs that includes Moscow, Rotterdam, New York and Geneva.

"It depends how you define trading hubs. The big three are obviously Houston, Singapore and London. But there are also big concentrations of traders in Moscow, Rotterdam, New York and Geneva. Dubai would be towards the top of this second tier," he said.

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 area to flourish as the main hubs for global oil products trade. While the precedent for trading oil for profit in the Middle East is far from reassuring, there are reasons to be hopeful.

Storage capacity

Increased storage facility in Dubai would be "very beneficial" in terms of the development of the emirate as a global trading hub, Johnson said. In fact developments are taking place as far as expanding of storage facilities in Dubai is concerned. Emarat, the Dubai-based, government-owned fuel trading company, has recently commenced the construction works of the expansion project at the Fujairah Storage Unit for storing and distributing gas oil, fuel, petrol and jet fuel. The expansion would increase the storage capacity to 250,000 cubic metres. The total project cost is Dh250 million.

Besides, the Dubai Multi Commodities Centre (DMCC) is also constructing a new storage facility to store refined products near Jebel Ali. Sources said DMCC, along with two other partners, plans to construct a 500,000 cubic metres storage facility at Technopark near Jebel Ali. The upcoming airport in Dubai and an expected rise in demand for jet fuel is one of the reasons for constructing the facility. The total capacity of fuel storage in Jebel Ali today stands at about three million cubic metres, sources said.

Some of the private companies that have storage facilities are also expanding their capacities, analysts said.

Storage capacity in Fujairah, already the world's number three ship refuelling hub, is estimated at 2.5-3 million cubic metres, and future expansions could raise it to up to 6.5-7 million cubic metres.



Lenient view

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 such as petrol and diesel, for which import demand has risen as the petrodollar revenue boom has fuelled strong consumption growth. Long term, that trend is expected to be reversed: massive refinery expansion projects look set to give the Gulf a significant surplus of refined fuels by 2015. This is an equally compelling proposition for oil traders looking to make a market.

Raja Kiwan, a Dubai-based analyst with PFC Energy, a global energy firm, points out in his recent report that new supplies from refineries could plug the gap in the Gulf.

"The upgrade of Dubai's 120 mbpd condensate splitter is expected to be completed during the fourth quarter. With the installation of a reformer and hydrotreater at one of the 60 mbpd distillation units, the entire plant will now be able to process sour condensates sourced principally from Qatar's North Field and Iran's Kangan Field," Kiwan wrote in his report.

"Once completed, production of petrol from the newly installed 36 mbpd catalytic reformer will transform Dubai into a self-sufficient market, while any excess low-sulphur naptha will be destined for Asian markets," Kiwan added. " When fully operational, the plant's diesel yield could reach 15 mbpd or roughly 35 per cent of Dubai's entire market."

Besides, two refineries coming up in Saudi Arabia and Qatar will also meet the demand of refined products in the region. "Saudi Arabia's recently commissioned PertoRabigh refinery should see first production of petrol within the coming two months. An additional 60 mbpd of high-octane petrol to be converted from fuel oil at the 400 mbpd refining and petrochemicals complex will lead to a net import decline of about 12 per cent (15 mbpd) this year from 2008," Kiwan said. The decline could have been significantly higher but for the exceptionally large volumes imported during the first four months of 2009 due to refinery maintenance, he added.

In the meantime, Qatar's 146 mbpd condensate splitter is set to make its debut in July, coinciding with increasing production of condensates that should exceed 720 mbpd this year, Kiwan said. Faced with oversupplied Asian markets, the splitter is not expected to operate at full capacity in 2009 and the remaining incremental capacity can spill over to 2010, he added.



Trading centre

Meanwhile, Dubai is on its way to establish itself as the trading hub for crude in the East of Suez markets. The average daily volumes of Dubai Mercantile Exchange (DME) have increased 68 per cent between 2008 and 2009 (year-to-date), said the exchange.

"The DME average daily volume has increased significantly since the start of 2009, driven by more diverse participation and backed by increased confidence in the contract as the most efficient pricing and risk management tool for the East of Suez market," DME said in its second anniversary update. "On a typical day, DME Oman is traded by more than 30 participants and trades an average of 2.1 million barrels."

The exchange aspires to establish itself as the "third global crude benchmark" alongside WTI and Brent. It continues to engage with regional NOCs and the broader oil industry to establish itself as a suitable benchmark for 'East of Suez' crude oil market.

Oil industry insiders have long believed that if Saudi Aramco could price its crude on the basis of DME benchmark, other GCC majors could follow suit, thus prominently increasing the importance of DME.

Talks between DME and Saudi Aramco were on even before the exchange was established. The exchange's DME Oman benchmark today provides the official selling price for Dubai and Oman crude.

Alongside the improved volumes, open interest – the total number of options and/or futures contracts that are not closed or delivered on a particular day – has also improved substantially, DME said. "The baseline DME Oman open interest in 2008 was 3,226 lots (equivalent to 3.2 million barrels). Since December 2008, the minimum open interest has been 6,502 lots (equivalent to 6.5 million barrels)," it added.

Record total open interests of 18,656 lots (equivalent to 18.7 million barrels) were reported in April, DME said.



Why will demand rise?

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.

Morgan Stanley more than tripled its leased storage in the region to 1.5 million barrels this year, while in the past few years, US oil firm ConocoPhillips and a unit of Thailand's PTT have joined the likes of Vitol, BP and Lukoil to open Gulf trading outposts.

Considering that the Middle East is one of the few regions in the world where demand for energy will continue to rise even during the recession, the pace of fuel trade in Dubai is not expected to slow. Therefore, even in 2009, Dubai could continue on its way to become the world's fourth major fuel trading hub, making the region as important a swing factor in petrol and diesel markets as it has long been for crude.

The Middle East will use 7.2 million bpd of oil this year, the International Energy Agency (IEA) said, nearly as much as number two energy user China despite having under half as many people. The IEA expects the region's demand to grow 2.5 per cent, while consumption falls in almost every region, including China.

However, its growth as a centre of physical trading remains in the primary phase. Liquidity is still too thin to create benchmark prices and access to storage facilities is still largely limited to the owners; and hoped for local futures and derivatives contracts for oil products are yet to be launched. But analysts say it is only a matter of time, with many firms expanding their presence in anticipation of short-term shortages and longer-term surpluses. What could add to the pace of Dubai emerging as a trading hub is the fact that most of the countries in the region need more refined products.

The scene is particularly encouraging with regards to jet fuel. Most of the regional airlines buy jet fuel from Dubai. In addition, several airlines taking a trans-continental route stop for re-fuelling in Dubai. Qatar imports most of its petrol and diesel from Dubai. Even countries such as Maldives buy most of their fuel from Dubai, Mohamed Abdul Sattar, a general manager with State Trading Organisation of Maldives, told Emirates Business.

 

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