Oil traders rent South Korean storage after virus hits China demand

LONDON/SINGAPORE (Reuters) - Several top trading houses have rented millions of barrels of crude storage in South Korea this month to hold excess oil supplies after the coronavirus outbreak dampened demand in China, the world’s largest importer, trading sources said.

FILE PHOTO: Oil storage tanks are seen at a port in South Korea's biggest port city Busan, about 420 km (262 miles) southeast of Seoul, February 28, 2008. REUTERS/Jo Yong-Hak/File Photo

Supplies in the region are piling up after Chinese refineries cut output by about 1.5 million barrels per day (bpd) over just two weeks.

Trading firms Trafigura [TRAFG.UL], Glencore and Mercuria as well as the trading division of French oil major Total have rented close to 15 million barrels of storage tanks from South Korea’s state oil firm Korea National Oil Corp (KNOC) [KOILC.UL], they said.

The traders took on new storage leases for three or six months, with a contango market structure - in which longer-dated oil futures trade at a premium - defraying some costs while they wait for a rebound in demand after China recovers from the outbreak, the sources said.

The virus has severely hit prompt demand, causing a build-up of crude meant to be sold to Chinese refiners after the Lunar New Year holidays, traders said. Cargoes arriving in Asia from late February to April are being offered in the market, they said.

Lower demand from China caused the Brent and Dubai market to flip into contango earlier this month for the first time since July 2019, as prompt prices fell below forward prices.

Traders are also betting on a buying spike once the virus is contained and China’s major refiners ramp up operations, the sources said.

Crude cargoes are being diverted to South Korea, Malaysia, Singapore and some locations in China where storage tanks are filling swiftly, sources have said.

Storage leased in South Korea won’t be sufficient to hold the overhang in the market, a Chinese trader said, which has already caused spot premiums for Russian ESPO crude, a popular grade among Chinese buyers, to hit a 2-1/2 year low.

Trading firms have also been booking some short-term floating storage. At least one trader said it had provisionally booked a very large crude carrier capable of holding two million barrels.

A source close to Trafigura confirmed it had taken a substantial position in terms of storage at KNOC for the contango structure. Glencore, Mercuria and KNOC declined to comment. Total did not immediately respond to a request for comment.

KNOC has a storage capacity of 136 million barrels to stockpile crude oil and refined oil products, spread across nine facilities, according to data from the state-owned company.

Reporting by Julia Payne and Dmitry Zhdannikov in London and Florence Tan in Singapore; Additional reporting by Jane Chung in Seoul; Editing by Himani Sarkar and David Holmes