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Cold storage: traders shift oil products out of tanks as short-term demand soars

Reuters  |  SINGAPORE 

By Jessica Jaganathan

(Reuters) - Some energy traders in Southeast are cutting their use of tanks as short-term demand for products soars, hitting companies that rent out at a time when many of them have just expanded their capacity.

Three traders told they have cut the amount of they hold in tanks or decided not to renew contracts in the past year.

A shift away from could potentially be bad for tank operators running in the region like the Netherlands' Vopak and Oiltanking, a subsidiary of Hamburg-based Marquard & Bahls. Oiltanking declined comment.

But Vopak said it is focused on long term imbalances.

"Our business is mainly serving structural product flows and is therefore relatively limited exposed to contango and backwardation situation," a company spokeswoman said.

"in this backwardated market makes no sense as we won't be able to recoup the costs to store the oil," said a Singapore-based trader in middle distillates, a group of products including gasoil and jet fuel.

Backwardation refers to a market where prices for prompt-loading cargoes are higher than for months further out, making uneconomical.

The trader, who declined to be identified as he was not authorised to speak with media, added that his firm had recently decided not to renew a short-term lease.

The Asian gasoil and fuel markets have been backwardated for most of this year.

The spread between the front-month and second-month gasoil contract climbed to an over three-year high of 50 cents a barrel this week, while the fuel spread is trading at parity, compared with about minus $4 a tonne at the same time last year.

To make money by holding products in tanks, the spread between gasoil prices for future months needs to be at about minus 60 to 70 cents a barrel or less to cover the cost of leasing tank space and borrowing the money to buy the fuel to fill it.

And traders who are keeping some products in are putting pressure on tank operators to reduce rates, the sources said.

For instance, trader Glencore has reduced its lease volume of middle distillates, while trader Vitol may be giving up some tank space for fuel though discussions are still ongoing, the three traders said. Glencore declined to comment, while Vitol did not immediately respond to an email seeking comment.

rates for middle distillates have dropped to about S$6.50 ($4.72) to S$7 per cubic metre from S$7.50 to S$8.50 around 1 to 2 years ago, while fuel tank rates have fallen to about S$5 to S$6 from S$6.50 to S$7 a few years ago, they said.

Many traders are also re-negotiating contracts to shorter time periods of six months to 1 year, from longer term contracts of 2 to 5 years previously, two sources from operators said.

Expanding capacity in the Johor Straits between and Malaysia has also put pressure on tank rates.

Oiltanking commissioned the Karimun terminal with a total capacity of 730,000 cubic metres in mid-2016, while Jurong Port and Oiltanking are building a 200,000 cubic metre facility in Singapore, to be ready by 2019.

Traders are also opting to store fuel in tankers as freight rates for very large crude carriers have halved from 1-1/2 years ago, the sources said.

"Tankers provide more flexibility as they can meet bunker demand quickly without having to load and unload in tanks," said a Singapore-based fuel trader.

($1 = 1.3769 dollars)

(Reporting by Jessica Jaganathan; Editing by Joseph Radford)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, July 14 2017. 16:51 IST