New oil pricing adds to Singapore clout

|TAP Special| Singapore’s importance as an oil trade centre has received further boost with Platts adopting e a new system from next month for determining oil product values with reference to loadings out of the city state as well as Malaysia. This is expected to encourage use of regional oil storage facilities.

According to Reuters, the change in how fuel oil, diesel, jet fuel and gasoline are assessed for loadings out of Singapore and Malaysia takes a borderless approach similar to that in the world’s largest oil storage hub Amsterdam-Rotterdam-Antwerp (ARA).

The main change is that from July in Platts’ free-on-board (FOB) Singapore price assessments – the basis for most contract and spot deals done in Asia – traders at the time of making a bid or offer for a cargo will no longer specify a loading point in Singapore or southern Malaysia.

Daily trade activity will instead be classified as FOB Straits – although price assessments will still be published as FOB Singapore – and buyers and sellers will decide on loading terminals only after a deal is done.

“This move makes the Singapore market effectively move to an ARA-style system, although with some significant differences. In some ways, it was already being practiced, with Platts ‘approving’ certain locations in Malaysia previously,” said Tushar Bansal, head of consultancy FGE’s oil team for East of Suez region.

Reuters quoted many traders saying that the change to a system where loading points are not pre-determined will expand the use of storage sites in Malaysia. It will also increase liquidity in Platts’ price assessment process known as Market-on-Close as more regional storage terminals are approved as loading points for FOB Straits bids and offers, including possibly in Indonesia, traders said.

“This is a good thing for the market, as it will attract more investments into the region, which will expand storage space and make tanks cheaper for traders,” a Singapore-based storage operator said.

Companies like Netherlands-based Vopak, Germany’s Oiltanking and Vitol-linked VTTI have poured in billions of dollars to build more storage capacity near Singapore over the past several years, an opportunity that arose because of Singapore’s land scarcity.

The additions, though, still have the 16.1-million-cubic-metre Singapore-Malaysia storage hub running a distant second to ARA, where storage capacity is 38 million cubic meters, as per storage advisory Ratio Group’s estimates.

Besides 20 terminals in Singapore, Platts now includes four Malaysian terminals in its price assessments, namely, Pasir Gudang, Tanjung Langsat, Tanjung Bin and Pengerang.

But even with the Malaysian terminals making up more than 20 percent of the combined storage capacity in the area, cargoes traded out of Singapore’s northern neighbor in Platts’ pricing process made up only 6 percent of the total number of trades in the first four months of this year.

To be sure, Platts – a unit of McGraw Hill Financial – said in a response to emailed questions that the assessment change is not aimed at boosting liquidity in its pricing process, only at reflecting the rise of regional terminals outside of Singapore.

But some traders have still been reluctant to lease tanks in Malaysia and some remain empty, while at least one Indonesian project has been delayed.

Their worries, according to traders, include extra costs for moving products between ports in different countries – though Platts says such charges are minimal – and draft limits that at some Malaysian ports can restrict loading bigger vessels.

Also, Singapore has more free trade agreements than Malaysia, which could make storage in the latter country less attractive, two Singapore-based traders leasing tanks in the city-state said.

“Given that Singapore, Malaysia and Indonesia do not have an EU-like system and will be considered as separate origins for the buyers of cargoes … (there) will be different tax implications”, FGE’s Bansal said.

Still, with rental and manpower charges going up in Singapore, tanks in Malaysia could become more attractive in the future, traders said.