Backed by a surge in oil refining, Dubai's could eventually morph into a trade hub to rival Singapore; but emirate must tackle transparency issues
A surge in oil refining in India and the Middle East could eventually turn Dubai into a trading hub to rival Singapore, but much depends on the emirate's capacity to deal with derivatives for hedging price risk.
At the centre of the world's top oil producing region, Dubai's role has focused on oil sales rather than trade. But increased refining activity and new port capacity could change that.
Companies, dedicated to more complex dealings than direct transactions between the producer and the end-user, have already added staff over the last year.
Strategically located to handle the results of a rise in Middle Eastern and Indian refining, some of Dubai's advantages, traders say, outweigh those of Singapore, which is the main alternative to US and European-based oil dealing.
"Singapore is a small island. There is a challenge to get more space. Ideally you would like to keep more storage in Singapore, but they would have to build more artificial islands," said a trader.
Total storage capacity in the Singapore oil products hub stands at close to 10 million cubic metres (cu m), after Singapore bunker fuel supplier Chemoil Energy Ltd and Emirates National Oil Co boosted capacity of their terminals over the past year.
"In 10 years, Dubai has the capacity to outperform Singapore, because they [Singapore] lack [scope to enlarge] storage capacity," said a trader from a Chinese company.
Over the last year, Dubai's Jebel Ali port has become a trading hub for base oil, used in the production of lubricants.
Capacity at Fujairah, the world's No. 3 ship-refuelling hub, has also expanded and is expected to continue to grow over the next five years.
This extra storage could accommodate some of the surge in capacity from India as well as additional refined products from national oil companies in Abu Dhabi and Saudi Arabia.
Middle East oil product output is set to rise by 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, Singapore-based consultancy FACTS estimated.
The increased amount of products is a challenge to the region's big OPEC members, including Saudi Arabia, Iran and Kuwait. They effectively ban their customers from trading their crude, which is priced each month when the relevant authorities issue official selling prices.
The oil powers take a different view of refined products, such as gasoline, naphtha and diesel, which historically the Organisation of the Petroleum Exporting Countries has not been able to influence.
There are, however, obstacles. The region lacks the regulations and transparency of mature trading hubs, but most importantly, dealers need to be able to hedge cargoes by using paper instruments, which are not established in the region.
"The paper market is almost not traded here. There is always a paper-side to it, but done in other markets like Singapore or London until more instruments are introduced in the Middle East to protect prices," one trader said.
The so-called window is used by oil traders to post bids and offers made on the over-the-counter oil markets. For now there is no window in the Dubai time zone and there are no immediate plans for Platts to change that, the firm's marketing department told Reuters.
Platts, a unit of US McGraw-Hill Cos Inc, provides price benchmarks in a number of illiquid or opaque physical energy markets, often determining pricing through a series of bids, offers and trades during a half-hour "window".
Futures trade on the NYMEX-backed Dubai Mercantile Exchange, which launched its Oman futures contract in 2007, has repeatedly hit new records and earned praise from many traders. It has, however, shelved plans for a jet fuel contract.
"The DME for the past two years had its strategic focus on the DME Oman benchmark and was therefore not looking at other contracts or products," the DME said.
Some traders have said they were pleasantly surprised by the success of the DME and Oman benchmarks. Others remain sceptical.
"We follow Singapore Platts and international markets," said Naila Shirazee, manager of corporate excellence at Galana Petroleum, an oil company operating mainly in East Africa.
Traders also cited as an issue the lack of a regulatory framework and levels of transparency that characterise mature trading hubs.
"Regulation is a problem. They don't have an appropriate banking system in place to support oil and gas operations," said Bhagwan Gawai, managing director of Saurabh Energy, a Dubai-based oil and gas trading company.
"It's very difficult for trading companies to operate here. There is also little support from the government and a lack of infrastructure."
Many traders, however, predict development would happen naturally as the trading houses increase their presence.
"Now almost everybody is here. Transparency will take time, the force of the market will overcome these elements. Money transactions can take place anywhere in the world, so transparency and regulation is not an issue. This will not keep the region from becoming a trading hub," a trader said.
On balance, some analysts still believe the traditional model of keeping an office in Singapore and the other in Europe remains ideal and after that, China could be the future.
"If you have a trading operation in London or Geneva and Singapore to cover the Chinese market, do you really need to have one in the middle?" said Olivier Jakob, analyst at Swiss-based Petromatrix.
"The standard operating model is to have one trading hub in Europe and one in Singapore that is where the demand power for finance operations is coming from. The trend now is that companies are setting up small representative trading offices in China."