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South Korea to add oil storage as traders eye China teapots

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South Korea will make more space available to store crude as it seeks to take advantage of its proximity to one of the oil market's bright spots: China's independent refineries.

[SEOUL] South Korea will make more space available to store crude as it seeks to take advantage of its proximity to one of the oil market's bright spots: China's independent refineries.

"Demand has been continuously on the rise for more storage space from us as the market remains oversupplied," said Semin Kwon, head of Korea National Oil Corp's Singapore unit.

"The proximity to China is attracting more interest from potential suppliers." South Korea's state-run explorer will offer 3.5 million barrels to 5 million barrels of crude storage capacity in the second half of this year through an optimization process, Mr Kwon said in a telephone interview on Wednesday.

The company will complete five onshore tanks in Yeosu that can store a total of 2.5 million barrels of oil by the end of next year, and an underground cavern in Ulsan with a capacity of 10 million barrels will be ready by 2020, he said.

KNOC is expanding storage options as competition intensifies to supply China's independent processors known as teapots, as these refineries are expected to buy more crude from overseas.

Saudi Arabia recently sold its first spot cargo of oil to Shandong Chambroad from a leased tank in Okinawa, Japan. Yeosu is about half the distance of Okinawa to Qingdao in Shandong province, where most teapots are clustered, which means lower shipping costs and faster delivery.

China's inbound crude shipments climbed to a record in the first quarter in part as independent processors purchased more supplies from overseas after the government eased import rules last year.

These smaller plants account for about 28 per cent of the nation's total capacity, according to ICIS-China, a research company. As of end-February, 27 teapots have obtained or applied for crude-import quotas totaling 89.5 million tons, according to the China Teapot Alliance.

Brent crude has declined for three years, sinking to a 12-year low in January as supplies continue to outpace demand. The surplus created a market structure known as contango, where prices for immediate delivery are lower than future months, making it profitable to buy oil for storage to be sold later at a higher price.

Front-month futures were US$3.50 cheaper than contracts expiring 12 months later at 10:11 am Singapore time Thursday on the London-based ICE Futures Europe exchange.

"The contango is increasing calls for more storage," said Mr Kwon. "It also makes it easier for companies to supply to teapots when the demand is there. A few days is all it takes for the shipments from Korea to arrive in China." And distance does matter.

State-owned Saudi Aramco's maiden deal with a Chinese teapot should "lay any doubts to rest" about the company's ability to use its logistical system and spot sales to boost market share, according to Citigroup Inc. The 730,000-barrel shipment is expected to load in June.

BLOOMBERG