13 Mar 2020 | 05:31 UTC — Tokyo

Low crude oil prices, contango structure supports new Japan-Asia storage strategy

Highlights

METI seeks oil storage cooperation with Philippines, Vietnam

Current low oil price, contango structure supportive

Tokyo — Japan is set to form, by the end of March, a formal strategy outlining its cooperation with Asian oil consumers to work out reciprocal supply frameworks at a time when the current low oil prices and a steep contango structure work in favor of developing new storage plans.

Although demand destruction has dominated global oil market headlines in recent months, amid the spread of the coronavirus, Asian refiners and policymakers highlighted the importance of updating supply security strategies as market fundamentals could change rapidly at any time.

Japan's Ministry of Economy, Trade and Industry released on Thursday, a draft of the government's new international resources strategy, under measures including which Tokyo intends to support some Southeast Asian consumers develop their own petroleum reserves.

Under the strategy, which is expected to be finalized by the end of March, METI intends to seek petroleum reserves cooperation with such countries as the Philippines and Vietnam by helping them develop their petroleum reserves strategy.

Recent sharp declines in outright benchmark crude oil prices, in conjunction with a contango market structure, bode well for some Asian consumer nations looking to build and develop storage.

"The current condition might be an opportunity for Asia to develop their petroleum reserves," a ministry source said.

The Philippines' Department of Energy, for example, is considering a proposal from METI to establish a reciprocal framework aimed at ensuring uninterrupted flow of crude and oil products as it aims to develop the country's strategic petroleum reserves, assistant secretary Leonido J. Pulido III told S&P Global Platts in an interview in Tokyo on January 30.

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The current low oil price environment is supportive for some Asian countries to develop their oil reserves as high costs of holding inventories for an indefinite period have long been major economical and physical barriers to doing so.

Platts Asia and Middle East outright crude price benchmark cash Dubai tumbled to $32.85/b on March 9, the lowest level since $32.25/b assessed on March 4, 2016.

Dubai contango structure

The front-month and third-month Platts Dubai swap spread fell to minus 17 cents/b on February 7, marking the first time the market structure flipped to contango since minus 13 cents/b assessed on January 8, 2019.

The contango has widened in recent weeks, with the spread pegged at minus $1.68/b on Wednesday.

A contango in the crude market structure represents higher prices for forward month contracts than the current spot price. In essence, contango occurs when market participants are expecting future prices to be stronger than prompt prices, hence providing an impetus for trading firms and refiners to store oil for later use.

Japanese refiners, meanwhile, are supportive of METI pursuing oil storage cooperation with Asian consumers as it might help utilize their petroleum reserves in the face of diminishing domestic demand.

At the end of December 2019, Japan's petroleum reserves stood at 514 million barrels, accounting for 234 days of consumption, and 193 days of imports, METI data showed, including 7.9 million barrels held by Saudi Arabia and Abu Dhabi.