Higher Demand For Oil Products Hits Oil Storage Providers

A jump in immediate demand for oil products in Southeast Asia is affecting oil storage capacity and services providers, according to local traders who spoke to Reuters. The timing of the demand spike is particularly bad for those storage providers that just expanded their capacity.

One trader told Reuters that “Storage in this backwardated market makes no sense as we won't be able to recoup the costs to store the oil.”  Reuters notes that the Asian markets for gasoil and fuel oil have been in backwardation—when spot prices or immediate loading prices are higher than futures—for most of this year.

Currently, the spread between the front-month contract for gasoil in Asia and the second-month futures is US$0.50—a three-year high, and about a dollar more than it needs to be for storing oil instead of selling it to become profitable. So, in addition to not renewing their storage contracts with tank owners and operators, trading companies are also pressing them to lower their rates.

They are also switching from tanks on the ground to oil product tankers: the motivation is that first, freight rates for tankers have fallen significantly over the last couple of years, and second, tankers are more flexible, according to the traders, “as they can meet bunker demand quickly without having to load and unload in tank.”

In a recent report, Platts forecast that the Asian oil product market in the third quarter of the year will see good demand for gasoil and fuel oil, while the gasoline, naphtha, LPG, and jet fuel markets will see weak demand.

The forecast is based on the current fundamentals of the fuels, with gasoline in oversupply as refinery runs are high thanks to low crude oil prices, and gasoil in deficit, thanks to strong demand from India, which earlier this year implemented a new emissions standard on par with Euro 4, capping sulphur emissions at 50 ppm nationwide.

By Irina Slav for Oilprice.com

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