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Oil Prices Slip As Crude Inventories Jump

Oil Prices Slip As Crude Inventories Jump

Crude prices fell on Wednesday…

Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Oil Hub That Could Counter Iran’s Strait Of Hormuz Strategy

In line with the UAE’s role as a principal member of the U.S.’s new Middle East strategy to counter China’s increasing influence in the region, Brooge Petroleum and Gas Investment Co., announced last week that it has begun operations at its 600,000 cubic metres (cu m) second phase storage facility at the Port of Fujairah.

This will bring its total capacity to around 1 million cu m, equivalent to 6.3 million barrels of crude oil. The additional capacity is part of the UAE’s plan – and the US’s – for Fujairah to dramatically expand its crude oil storage capacity to at least 12 million cu m by 2024, and – according to comments from the Fujairah port development authorities earlier this year - to at least 17 million cu m within a year or so after that. In so doing, the UAE and US hope to counter the threat that Iran will disrupt crude supplies through the Strait of Hormuz chokepoint – through which around 30 percent of the world’s oil transits – whilst being able to freely export its own oil supplies from the recently completed Jask hub at much higher prices (given the price spike that would result from a blockade of the Strait). As it stands, the once-fanciful notion of Fujairah – one of the UAE’s smallest and lesser known emirates – becoming one of the world’s great oil storage and trading hubs, alongside the Far East’s Singapore hub, Europe’s ARA (Amsterdam-Rotterdam-Antwerp), and the U.S.’s Cushing - gained real commercial momentum only after the major 2011/12 Strait of Hormuz Dispute.

This began in December 2011 when Iran threatened to cut off oil supply through the Strait should economic sanctions limit, or cut off, Iranian oil exports, and included a 10-day military exercise in international waters near the chokepoint. Fujairah at that point was rightly regarded as having an extremely strategically advantageous position to deal with such potential supply disruptions, being located both outside the Persian Gulf and 160 kilometers away from the Strait of Hormuz.

It was also seen as not aligned to any possibly pro-Iranian country, such as Oman, which at that time (and still) has major plans with Iran to co-operate in Tehran’s build-out of a world-class liquefied natural gas (LNG) sector. An additional advantage that Fujairah offered in that 2012 analysis was that it affords international oil companies the facility to do business in the same generally transparent and non-corrupt legal framework found across the UAE. 

Although various stages of Fujairah’s overall expansion plans were subject to delays prior to the onset of the last great downturn in global oil prices in 2020, due to lower forward oil prices making hydrocarbons storage a less attractive option, each element of the overall project to make Fujairah’s the pre-eminent Middle Eastern storage hub – termed ‘Black Pearl’ – has gradually come into line. The pace of this picked up after the 380 kilometer Abu Dhabi Crude Oil Pipeline from the Habshan onshore field in Abu Dhabi to Fujairah city became operational in June 2012, capable of transporting 1.8 million bpd and allowing for the smooth movement of UAE crude to the global market. 

At that time, Fujairah also rolled out a wide range of the corollary services required in a global storage hub, including facilities for the loading and discharge of partially laden very large crude carriers (VLCCs) for crude oil and refined products, the blending of crude oil, fuel oil and clean products, the storage and supply of bunker fuel, and inter- and intra-tank cargo transfer. Within a relatively short time, the Fujairah port’s jetties had the capacity to accommodate both small barge vessels (3,000 deadweight tonnage, DWT) and the larger VLCCs (up to 300,000 DWT). In 2015, Vopak Horizon Fujairah also announced that it was building five crude oil storage tanks with a total capacity of 478,000 cubic meters at the port and intended to expand that number. 

Part of the positive backdrop for the continued expansion of the Fujairah hub was always expected to be the trade flows coming out of the Dubai Multi-Commodities Centre, with more storage capacity allowing traders greater flexibility in their deals, and a very supportive financial infrastructure created by the Fujairah authorities. This has certainly proven to be the case and Fujairah further stands to benefit from the ongoing rise in volumes traded over the recently established Abu Dhabi-based ICE Futures Abu Dhabi (IFAD). This has seen the number of contracts traded jump from 6,344 (equivalent to 6,344,000 barrels) on 29 March to a high of 20,124 (20,124.000 barrels equivalent) on 6 July. 

Related: Crude Stocks At Cushing Have Dropped By 42% So Far This Year

Launched in March this year, the IFAD was specifically created for the trading of Murban futures contracts. The light, sweet Murban crude oil grade is one of the four crudes produced by the UAE’s key geopolitical corporate hydrocarbons proxy, ADNOC, although it is the main one in volume terms, accounting for around half of the UAE’s total near-4 million bpd crude oil production before the outbreak of the COVID-19 pandemic. According to ICE and ADNOC, Murban futures is the second most physically delivered futures contract traded on a regional exchange after Dubai Mercantile Exchange’s Oman crude futures, and Murban is also a deliverable grade in the Platts benchmark Dubai and Oman crude assessments. ICE and ADNOC partnered with BP, GS Caltex, Inpex, ENEOS, PetroChina, PTT, Shell, Total, and Vitol to launch the IFAD, and ICE has also announced agreements with Chevron, Trafigura, and Occidental to explore using the contract to price crude exports from the U.S. to Asia. 

Given this solid business rationale and its highly favorable geographical position, Fujairah looks set to continue to benefit from its highly advantageous strategic position outside the perennially troublesome Strait of Hormuz and outside the rest of the Persian Gulf as well. Instead, Fujairah offers an unencumbered direct port on the Gulf of Oman – but on the eastern side of Oman itself – which means that any oil kept there will be able to avoid any blockade that Iran might again be imposed on ships passing through the Strait of Hormuz. This option has become increasingly attractive to Iran given its finalization of the Guriyeh-Jask oil pipeline and as the U.S. dithers over concluding a new iteration of the Joint Comprehensive Plan of Action (‘nuclear deal’). Fujairah’s geographical position also allows any oil kept there to avoid any future problems that may arise with Oman if the Sultanate succumbs to China’s current wooing of it to become part of its OBOR-related sphere of influence. 

By Simon Watkins for Oilprice.com

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