New Global Crude Flows Make UAE A More Powerful Oil Trading Hub

In 2021, India’s refining giant Reliance Industries announced plans to move most of its oil-trading staff from Mumbai to Dubai. In 2022, Swiss-based Litasco, the trading arm of Russian Lukoil, moved part of its operations to Dubai, too. Rosneft and Gazprom Neft are also considering setting up a presence in Dubai. It’s not just traders, either. Reuters recently reported that Indian refiners had begun paying for their Russian oil cargoes in Emirati dirhams. And these dirhams are being paid on deals closed with traders based in Dubai. The unprecedented wave of sanctions that the West unleashed on Russia has now prompted a redesign of the international oil market. And it will likely be permanent.

Earlier this week, Reuters’ Alex Lawler detailed the shift in oil flows after U.S. sanctions on Iran and EU and G7 sanctions on Russia redirected Iranian and Russian crude to Asia and away from Europe and the United States. In doing this, the sanction push led to lower oil prices for Asian buyers after decades of what analysts had called “the Asian premium”.

“It’s safe to say that some major consumers in Asia, most notably India and China, are the major winners of the sanctions,” Ole Hansen, the commodities head of Danish Saxo Bank, told Reuters.

Indeed, China and India have been big winners from discounted Russian oil, and they have continued to be winners even as the discount began to shrink. When the EU was preparing to impose its embargo on Russian crude oil imports combined with a price cap regime coordinated with G7 in a bid to ensure the market remains well supplied, there was worry that the price cap regime would betray its purpose.

The reason for the worry was that the enforcement of the price cap was going to be in the form of denial of shipping and insurance services from Western providers for all Russian cargos sold for more than $60 per barrel. But the United Arab Emirates is not in the West. And it turned out there is a well-developed insurance and shipping industry there.

Reuters reported in early March that a growing number of Russian oil cargos were arriving in the UAE since the embargo began last December. The total volume of these cargos is nothing to write home about at 1.5 million barrels, but it is a break from the ordinary flow routes.

Yet a later report cited industry insiders as saying that demand for storage and transit capacity at the port of Fujairah was set to expand as more Russian barrels made their way to the UAE.

“We have seen a huge influx of Russian barrels coming into Fujairah … particularly Urals (crude oil) and naphtha,” one port official said at a recent industry event, as quoted by Reuters.

What’s perhaps more noteworthy is the fact that Asian buyers of Russian crude are working with Russian insurance and shipping service providers with a presence in the UAE to provide coverage for those cargos that would be denied by their Western counterparts. More importantly, this has been going on since before the price cap was agreed upon.

Russian oil exports to China and India are running at record highs. Even with a narrower discount to Brent crude, Russian crude can save refiners in India as much as $1 billion annually, Reuters notes. And then they can make a good profit by selling the fuels produced with Russian crude to Russia’s former crude clients in Europe.

The war in Ukraine has changed global oil trade routes, and it has changed them in such a way that buyers and service providers that used to reap the benefits of transporting virtually all of the oil around the world are now cut off from that.

Western insurers can only provide cover for Russian oil if it sells below the cap, and there is precious little information in just what portion of total exports that is to date. Major oil traders are shunning deals with Russian oil for fear they might violate sanctions.

Yet there are always alternatives, and the United Arab Emirates are emerging as the hub of those alternatives, with traders, insurers, and shippers all available to carry crude oil wherever it is needed.