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Asian Crude Oil Spot Market Across Malay Peninsula Proposed.

The following are excerpts from a presentation to the 13th Annual APS Conference made by Koichiro Nagata, promoter of major crude oil storage and pipeline facilities across the Malay Peninsula:

The need for an adequate trading centre for crude oil in Asia has been expressed for years by the various parties concerned, mainly the producers and consumers of crude oil in Asia. A trading centre able to reflect the fundamentals of the Asian crude oil market adequately must be located in the heart of Asia and must begin with a spot market for physical crude oil - or wet oil. Gradually, such a trading centre will be developed to provide adequate and comprehensive mechanisms and instruments for trading in paper oil, such as forward markets, swaps and options.

There is no such trading centre for Asia at present. As a result, some consumer countries in the Far East tend to pay a higher price for their crude oil supplies than in the case of consumer countries west of Suez. At present, the only spot markets for Asian crude oils are limited to Dubai crude oil as a pricing marker for sour crude oils, and Tapis (Malaysia) as a pricing marker for sweet crude oils. On the supply side, the volumes of physical crude oils involved in both cases are limited and are declining. The production of crude oil in Dubai has been falling steadily since the Gulf Crisis of late 1990, when it averaged over 420,000 b/d. Soon, Dubai production will be falling to less than 200,000 b/d.

When the physical volumes of marker crude oils available at the supply side are small, prices in spot trading can be easily manipulated. Because the volumes of Dubai, Tapis and other crudes aligned to them are small, they are dependent on the price movements of Brent. Brent is a West European blend of sweet crude oils produced in the North Sea and traded internationally. The prices of most of the world's crude oils are directly influenced by the price of Brent. Brent, which is a world marker, is itself influenced by the price of Western Texas Intermediate (WTI). WTI is a blend of domestic sweet crude oils produced in the USA but cannot be traded outside the USA.

Occasionally, mainly during peak summer months for gasoline or very cold winter months for heating oils in the USA, the spot or forward price of WTI shoots up and causes Brent to go up as well. When the price of Brent goes up, the prices of Dubai and Tapis crude oils will rise accordingly.

As a result, Asian consumers of crude oil (the oil refiners, power plants, etc) have to pay a higher price for their supplies even if their demand at those particular periods does not justify the rise. So at present, the existing markets for crude oils in Asia tend to reflect more the market fundamentals of the West than the market fundamentals of the East.

Of course, the situation is more complex and I am giving as simple an overview as possible. The subject of oil trading is beyond the scope of my presentation. My presentation is a proposal to establish an Asian spot market for crude oil across the Malay Peninsula. This is because we have a project - called Trans-Malay Peninsula Crude Oil Transaction (TMPCOT) - which is to build an infrastructure long required for this part of the world.

This infrastructure, TMPCOT, is a combination of major crude oil storage facilities, a major crude oil pipeline and two terminals to be built across the Malay Peninsula, with the possibility of building two major oil refineries on both sides of the Peninsula - the progress of which I shall explain in the second part of this presentation.

The TMPCOT infrastructure will be an ideal base for the Asian crude oil spot market which we are proposing. A special legal status for that area, including a proposed tax- free status or free zone, would make this area particularly attractive for the location of oil trading companies, banking units and other parties across the Malay Peninsula.

The existing Asian spot market for petroleum products in Singapore, which is nearby, will benefit from this considerably. Prices of petroleum products there will better reflect the market fundamentals of Asia. This products market and the proposed crude oil spot market across the Malay Peninsula will complement one another, as in the case of the spot market for crude oils in London and for petroleum Products spot market in Rotterdam.

The volume of physical crude oils which will be moving through the TMPCOT infrastructure will be large enough to sustain a spot market in the first phase and a more comprehensive crude oil trading centre at the later stages. Asia will become by far the biggest oil market in the world during the next decade, a subject that has been well covered by the APS series of annual conferences.

The immediate and primary purposes of the TMPCOT project are the following: 1. To relieve the dangerously heavy traffic along the Strait of Malacca, where tankers congestion will become more dangerous during the next decade.

2. To improve the security of crude oil supplies to the Far East, for supplies from the Middle East, from Asian producers west of the Malay Peninsula, from West Africa and from other sources.

In addition, the TMPCOT project will result in considerably saving of both time and transportation costs for crude oils moving to the Far East. Progress for the Trans-Malay Peninsula Crude Oil Transaction (TMPCOT) project and its competitiveness have improved dramatically, after a delay since the fall of 1997 when Asia was hit by an economic crisis. Now, Malaysia's economy is growing again and the economy in Thailand is improving. The Japanese economy is recovering. The economic situation in South Korea and Taiwan is much better. The experts say that the Asian economic crisis is over.
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Comment:Asian Crude Oil Spot Market Across Malay Peninsula Proposed.
Publication:APS Review Downstream Trends
Geographic Code:90ASI
Date:Oct 18, 1999
Next Article:SAUDI ARABIA - The Economic Base.

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