It is the engine oil cooler. Coolant flows around the upper portion of the oil filter attaching boss and keeps oil temps down. You might get away with disconnecting it for normal street driving, but if you push the car hard, oil temps can go up dramatically. You should normally see oil temps equal to or just over the water temp once the car is at operating temperature.
With dino oil, oil temps should be below 210-220 degrees. Temps above that for extended periods can cause problems. Switching to a synthetic oil will help protect the internals at oil temps 220 and above.