Dubai Mercantile Exchange holds first trade for Fujairah oil futures

The Dubai Mercantile Exchange said on Monday it had traded the first Fujairah fuel oil futures, which are designed to help the Northern Emirate achieve its ambition of developing as a world-class oil trading and logistics hub.

The DME said the inaugural trade was for 7,000 tonnes of high sulphur fuel oil, which is used primarily in shipping.

The Indian Ocean port city has been growing rapidly as an oil storage and trading hub and has become the world’s second-largest ship fuel bunkering terminal, although still trailing Singapore by a wide margin.

The Arabian Gulf has been among the world’s fastest growing regions in terms of energy demand, especially transport fuels, and has been adding oil refining capacity at a fast clip, as well as pipelines and other logistical infrastructure.

Fujairah has been the focus of much of the UAE’s plans to add capacity, with a US$3.3 billion, 370-kilometre oil pipeline, financed by Abu Dhabi’s International Petroleum Investment Company (Ipic), bringing about half of the country’s 3.1 million barrels per day of output to the port, bypassing the Strait of Hormuz. Planned enhancements will bring that capacity to 70 per cent of the country’s output.

Fujairah’s storage capacity has expanded rapidly to reach a goal of 13 million cubic metres, with outfits such as Vitol, the Switzerland-based trading company, Socar, Azerbaijan’s state oil company, Sinopec of China and Gulf Petrochem having major facilities – the latter doubling capacity last year with a new $60 million facility.

The DME has developed the region’s first crude oil future since its inception in 2008 and has been lobbying to expand its slate of activities.

“There is clearly a healthy appetite among regional market participants for a way of managing price risk at Fujairah,” said Owain Johnson, DME’s managing director.

However, a research paper by Gulf Intelligence this month found that the regional markets remain underdeveloped. “The physical spot markets are still somewhat old-fashioned. In essence, they revolve around benchmarks based in other regions and are not supported by deep and localised derivative markets,” the paper concludes.

“There is a growing desire to see the market develop, as the domestic downstream markets in the region post some of the strongest growth figures of any in the world and the refining construction boom looks set to continue,” Gulf Intelligence notes.

“The soaring regional demand for jet fuel, naphtha, diesel, gasoline and fuel oil are propelling discussions on the need to establish independent oil products benchmarks in the Gulf.”

The trade on Monday was between Vitol and Aegean Marine, a marine fuels specialist, brokered by Freight Investor Services in Dubai.

“This new derivatives contract represents a big step forward in Fujairah’s evolution from a pure logistics hub into a major trading centre,” said Chris Bake, an executive board member at Vitol.

The oil price collapse has slowed down development, however, and Ipic has not yet chosen an engineering, procurement and construction contractor for its planned $3.5bn refinery at Fujairah from an all-South Korean shortlist arrived at last year.

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