Oil traders eye alternate routes and buffers over Malacca risk

Shipping and industry groups have advised shippers to take extra care when passing through the Strait of Malacca and have increased vigilance on their vessels.

Oil traders are concerned about supply disruptions via the Malacca Strait after the Singapore Navy warned of possible attacks on tankers, but said alternate routes could be used that add slightly to costs while stocks on landed and floating storages offer ample buffer. However, they cautioned that the more than 30 tankers crowding the waters off Singapore, Malaysia and Indonesia used as storage tanks for distillates, fuel oil and crude could also be targets.

Traders also said there were about four million to five million tonnes of fuel oil and crude on board converted VLCCs anchored off Malaysia's ports of Tanjong Pelepas and Pasir Gudang.

While these storages provide a comfortable cushion to the market if an attack triggers serious disruptions, they also face risks.

"They are as vulnerable as any tanker sailing along the strait. But maybe less of a risk, because they are in closer proximity with each other and help can be rendered more readily," said a trader, who has cargoes on floating storages. "Also, it's probably less dangerous because fuel oil and distillates are less flammable. But I don't think these crazy guys are going to have the intelligence to check what's on board before they decide to go after a ship."

Malaysia and Indonesia are bolstering security in the Strait of Malacca, through which flows at least 15 million barrels of oil each day, while Singapore also raised alert levels and beefed up security at its airport and new casino resorts after the warning from the navy.

"Of course, we are concerned. But there's nothing more that we can do on our part as the cargo owners to prevent this from happening," a senior Singapore-based Asian trader said on Friday. "The alternatives are easy enough. The diversion around Indonesia adds two to three days to sailing time and costs a little bit more, but that's OK."

The trader said in the event of an attack on a tanker, the loss of a single cargo might be a problem for the owner, "but it's an opportunity for everyone else to sell at higher prices".

If the strait was blocked after an attack, tankers could sail further south along the western coast of Indonesia's Sumatra via the Sunda Strait and head north to Singapore, adding two to three days of sailing time. Ships moving to North Asia could sail towards East Java via the Lombok Strait or Banda Strait. For example, this would add $20,000 (Dh73,458) to $30,000 per day to the cost of carrying diesel or kerosene on an 80,000-tonne tanker.

Traders said the loss of a single cargo, even if it was on board a very large crude carrier (VLCC), would have minimal impact on the market's demand-supply dynamics because for distillates alone, some 14 million barrels were being stored on tankers in international waters around Southeast Asia.

"It could be disruptive to oil trades, but it would be not catastrophic," said David Kirsch, PFC Energy's Director of Market Intelligence Service. "It would also raise insurance rates, but typically the price of oil rises in conjunction with these insurance rates, so the impact is on the consumers, not the transit trade."

Carl Larry, President of Oil Outlooks and Opinions, said a global market struggling with oversupply would view disruptions such as a closing of the Malacca Strait or the refinery damage in Chile as supportive factors.

"As with Chile, the refined products that are in great oversupply are already water-borne and easy enough to move around the strait," he said, pointing to recent moves to send diesel to the quake-hit Latin American country, which have sent gas oil cracks to 11-month highs near $10 a barrel.

"I think there is the shock and hype factor about the delay for ships to get through, but the supply that so many are desperately looking to move gets a chance to ease," Larry added.

Still, most traders welcomed the heightened security in the strait, which has been plagued by piracy, adding that this would help deter further attacks and ease their worries.

"I would expect the strait to be very heavily patrolled, and the likelihood of any attack materialising is quite low – you have all that security on standby to prevent it from happening," said a distillates trader with a European firm.

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