Platts Mulls Oil Benchmark Changes

Platts proposing FOB Straits benchmarks to replace FOB Singapore. New benchmarks aimed at storage growth in Malaysia, Indonesia; move could boost liquidity and lower storage costs.

Oil pricing agency Platts is consulting with traders on proposed changes to its key oil product benchmarks in Asia to include ports in Malaysia and possibly Indonesia as cargo loading points to take advantage of new storage facilities.

Singapore, Asia's largest oil trading hub, faces land shortages that have driven billions of dollars of spending on the construction of storage facilities in neighbouring Malaysia and Indonesia.

Giving traders more flexibility in using those sites as cargo loading points could encourage even more investment and improve market liquidity, industry sources said.

"There is an underlying growth in terms of supply and demand with many countries expanding refinery capacity," said Jorge Montepeque, global editorial director of Platts' pricing group.

"Trade flow is growing massively and all the trade flow is resulting in changes in logistical facilities around the region with ports and storages growing."

Platts, a unit of McGraw Hill Group, is consulting with the oil industry on a proposal to change the loading points in its pricing assessments for fuel oil, gasoil, jet fuel and gasoline from July 1, 2015.

It wants to introduce new free-on-board (FOB) Straits benchmarks to replace the existing FOB Singapore benchmarks. With the FOB Straits benchmarks, traders would not have to specify a loading port at the time of placing a bid or offer in Platts' assessment process.

Sellers would instead nominate an approved port within Singapore or south Malaysia 7 to 10 days before loading. Under the proposal as it stands now, buyers would have to accept a deal in the Platts assessment process without knowing if the cargo would load from Singapore or Malaysian ports.

Platts' current benchmarks require sellers to declare upfront if they are planning to load the cargoes from Malaysia or Singapore storage facilities.

And while the proposed model might be emulating trade in the Amsterdam-Rotterdam-Antwerp (ARA) region, most cargoes in ARA are priced on a delivered basis, which presents less of a logistical problem for buyers, according to traders.

Trades done on an FOB Malaysia basis made up about 3 percent of total trades in 2013 for cargoes to be loaded under the Platts' assessment process for Malaysia and Singapore, the company said.

DIFFERENT FREIGHT, PORT CHARGES

The proposed changes could attract more companies to expand beyond Singapore, which has a total storage capacity of about 20.5 million cubic metres, traders said. And that could in turn bring down high storage costs in the city state, they said.

Malaysia has announced plans to build about 10 million cubic metres of oil storage by 2020 with oil and gas developments in the southern state of Johor. Indonesia will add at least 2.6 million cubic metres of storage capacity in Batam - an island near Singapore - by 2016.

"If Platts keeps dividing Singapore from other regions, traders have no choice but to keep paying high tank fees in Singapore," a Singapore-based middle distillates trader said.

Singapore's storage fees are currently about 10 to 50 percent higher than in Malaysia, with much of the capacity fully leased out, traders said.

Logistics, varying port and freight charges could pose problems in implementing the new benchmarks, traders said.

"In terms of port performance, the Malaysian ports cannot match Singapore yet, so this could cause delays and more operational costs," said a trader from a company which has a storage facility in Singapore.

Some of the industry sources Platts has consulted have said there could also be an issue with tax and free trade agreements for cargoes loading beyond Singapore, the pricing agency said in a report on Thursday.

Still, the move could boost liquidity in the region which faces competition from the Middle East and South Korea which are also investing in large storage projects, traders said.

"There is no more space in Singapore, so if you want to increase storage and if you want a bigger marketplace with more participants, there is no reason why ports in Malaysia cannot be added," said a trader with a company that has storage investments in Malaysia.

Thomson Reuters, parent of Reuters news, competes with Platts in providing news and information to the oil market.

By Jessica Jaganathan and Jane Xie