Social Sciences, asked by elvinvijoy, 3 months ago

Fujairah is a major oil trading hub in the region. Give reason

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Answered by ramneetsingh001
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How Fujairah is becoming a leading oil trading hub

Bora Bariman explains why Fujairah could become a major name in the oil industry

In September last year the BW Peony crude oil tanker sailed to the Port of Fujairah from Iraq to unload its supply in the UAE’s newly completed very large crude carrier jetty.

It marked another step in the northern emirate’s vision to cement its position as one of the leading oil trading centres in the world.

With an investment of $175m, the new jetty is another element in the government’s long-term plan to diversify its services in the hydrocarbon sector. Over the past 20 years, the Port of Fujairah has become the world’s second largest bunkering hub due to its world-class terminal and storage facilities. It has grown exponentially in terms of its capacity and is now able to provide nearly 10 million cubic meters (m3) of storage from over 300 tanks, up from 550,000 m3 of storage from eight tanks in 1994, with plans to increase capacity to 14 million m3 by 2020.

The number of berths at the port has also increased, allowing it to handle more than 2,200 vessels today compared to 400 vessels nine years ago.

The new jetty will increase the port’s capabilities by allowing it to load or discharge up to 2 million barrels of crude oil within a day and carry larger tankers with higher tonnage. More important is its location. Being the only channel for producers in the region outside the precarious Strait of Hormuz, it provides direct access to Asia and Africa. This will make it easier for producers to access some of the most promising energy-dependent markets in the South-South Corridor that stretches from Beijing to Lagos.

As a result, with significant government backing, growing storage capacity, a unique geographic position, and an internationally recognised legal system, the emirate clearly has the foundation in place to grow its position as the leading oil trading hub. So, what are the next steps?

Building a more robust trade environment

There are three areas that need to be examined: implementing the right regulations, increasing the knowledge of traders, and getting more local banks involved in this space.

When it comes to the regulatory framework, the elements are already in place to ensure appropriate structures are implemented. With the government keenly involved in the process, Fujairah can selectively adopt regulations that have worked well for other leading global hubs like Singapore. These regulations must create more international credibility for traders operating in the emirate while ensuring that they do not suppress efficient operations and the needed infrastructure investment.

Educating traders will be a two-fold process. For local traders, subsidies have been removed and there is a sense that the UAE is more open to the competitive forces of global markets. This shift will require traders to increase their knowledge and sophistication with respect to risk management strategies in order to manage oil price volatility. Meanwhile, local traders need to move beyond the current flat-price structure, wherein they focus on immediate basis risks and allow inventory to build-up without disciplined hedging strategies.

This is where banks must play an important role. They will need to understand the dynamics of their customers’ businesses and help them actively manage risks through market cycles. For example, National Bank of Fujairah’s treasury desk is active in safeguarding its energy sector clients against price swing risks and transforming their structure inventories into hedged assets.

This will only be effective when more local banks invest in growing their capabilities in this sector to provide the products and services that international banks offer their clients in other leading energy hubs around the world.

As the sector develops and both banks and traders become more educated in the role that risk management and trade finance can play in increasing liquidity, the opportunities to build a more robust trading environment are substantial.

Establishing an independent oil benchmark

We see today that world-class terminal infrastructure has been developed in Fujairah. The world’s leading traders are also increasing the volumes traded through the UAE, and price reporting agencies are increasing their analysis of the trade flows to develop an independent pricing benchmark that reflects the emirate’s dynamics.

Looking ahead, according to the US Energy Information Administration, global energy consumption is expected to increase by 48 per cent to 2040. As the UAE’s market participants (including traders and banks) grow in sophistication and introduce appropriate legal, risk management, and operational best practices, they will be well placed to serve a global market that is looking to the Arabian Gulf for its energy resources.

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