S Korea expands state oil reserve capacity but backwardation bodes ill for new stocks

27-Nov-2021 Intellasia | Spglobal | 5:02 AM Print This Post

South Korea recently increased its state crude oil reserve capacity to nearly 150 million barrels after the completion of a new underground storage facility, but the country’s refining industry participants said November 26 that Seoul should wait for oil prices to ease before adding new stocks.

Register Now The Ministry of Trade, Industry and Energy and state-run Korea National Oil Corp, or KNOC, recently completed construction of a new underground crude oil storage facility in Ulsan located in the country’s southeast coast.

The new storage facility can hold 10.3 million barrels of crude, expanding the country’s total storage capacity of strategic reserves to 146 million barrels, a senior official at the energy ministry said.

South Korea currently holds 96.01 million barrels of strategic reserves 82.43 million barrels of crude and 13.58 million barrels of oil products equivalent to around 106 days worth of domestic demand as recommended by the International Energy Agency, according to the ministry and KNOC.

The country’s private-sector currently holds a combined total of around 103.11 million barrels 38.9 million barrels of crude and 64.21 million barrels of oil products allowing South Korea to go 200 days without imports of oil in case of emergencies. The new storage tanks run by KNOC will help boost South Korea’s energy security, the energy ministry official said. Oil storage facility is particularly important because South Korea, the world’s fifth-biggest crude importer, has to import all its crude oil requirements from overseas, he added.

Of the total, 116 million barrels, or 80 percent of the total state storage capacity, are tunnel-type underground facility, which are safer and more environmental, according to the ministry. With the addition of the new underground storage facility, KNOC now runs a total nine state-run storage bases.

Not ideal to add new stocks now

Taking the high crude oil prices and backwardation in the market structure into account, the government should ideally wait for the market dynamics to change before considering building up its strategic reserves to maximise storage economics, crude oil, naphtha and middle distillate traders at South Korea’s major refiners and petrochemical makers told S&P Global Platts.

“The newly increased capacity could encourage the state to add new stocks to its reserves but the timing is horrible right now and the state officials and decision makers should wait for oil prices to turn lower or the market structure to flip to contango,” said a sour crude trading manager at a major South Korean refiner.

“Backwardation bodes ill for storage plays… in simple terms, one should avoid buying high and selling low,” said a condensate trader at Hanwha Total. The spread between first and third-line Dubai crude swaps flipped to positive territory at 10 cents/b November 2020, and the backwardation in the Dubai price structure has persisted so far this year, with the spread last assessed at $2.18/b November 25, Platts data showed.

A backwardation in the crude market structure represents lower prices for forward month contracts than the current spot price. In essence, backwardation occurs when market participants are expecting future prices to be weaker than prompt prices, hence providing little incentive to store oil for later use.

SPR release also not an option

Earlier in the week, the energy ministry said South Korea will release crude oil from its strategic petroleum reserve in a joint effort with the US to ease rising oil prices and tame consumer inflation. However, Seoul did not provide specific details, including the timing and exact volume of the country’s SPR that would be released.

The country’s private sector, especially major refiners including SK Innovation and S-Oil, emphasized that the state SPR should be utilised in critical events such as drastic supply disruptions due to major geopolitical events like war, not for commercial reasons like high prices.

Besides, the country’s private sector holds more oil in reserves than the state, while there’s no guarantee the crude in national reserves could immediately feed local refineries as each plants have very specific feedstock configuration and the specification of crude required changes every week, according to plant operation managers and engineers at the major refiners.

At most, South Korea could release about 4 percent of the country’s SPR, equivalent to around 3.8 million barrels, as it did in the past, a source at the energy ministry told Platts. South Korea released 3.467 million barrels from its SPR during the Libyan crisis in 2011, which accounted for about 4 percent of the state reserves at the time.

https://www.spglobal.com/platts/en/market-insights/latest-news/oil/112621-s-korea-expands-state-oil-reserve-capacity-but-backwardation-bodes-ill-for-new-stocks

 

Category: Korea

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