Singapore — Vietnam is considering lowering mandatory oil inventory levels at major oil companies to 20 days worth of domestic demand from the current 30 days, a move that could help local fuel distributors and exporters maximize their profits from the backwardation in the Asian market structure and flexibly manage their stockpiles amid fragile consumer demand recovery.
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The move is one of the changes being considered in a draft decree amending and supplementing the original decree issued in 2014 on oil products trading, Petrolimex deputy general manager Tran Ngoc Nam said during the state-run company's 2021 annual general meeting of shareholders April 26.
The Ministry of Industry and Trade as well as the Ministry of Finance have already received a slew of industry comments and reviews on the proposed changes to the decree, which will be submitted to the prime minister for final approval in the coming weeks.
A key reason for the proposed reduction in the mandatory inventory level is Vietnam's expansion of its overall oil inventory after new storage facilities were set up at the 130,000 b/d Dung Quat refinery and the 200,000 b/d Nghi Son complex.
In addition, a sharp rebound in outright international benchmark oil prices and backwardation in the refined products market structure so far in 2021 work in favor of a free flow of domestic distribution and sales, as well as prompt cargo exports, which in return could generate more tax revenue for the government, middle distillate traders across Vietnam told S&P Global Platts.
The front month-second month Singapore gasoline swap spread has averaged 23 cents/b to date in the first half of 2021, flipping to backwardation from H2 2020 when the spread averaged minus 16 cents/b and in H1 last year when it averaged minus 63 cents/b, Platts data showed.
Backwardation in the oil market structure represents lower prices for forward month contracts than the current spot price and arises when market participants expect future prices to be lower than prompt prices, hence discouraging trading firms and refiners from storing oil for later use.
Fragile demand recovery
The proposed change in the oil inventory decree would also allow local trading and distribution firms to flexibly manage their stockpiles in times of high uncertainty, as inventory levels should ideally be kept to a minimum for the companies to maintain a healthy balance sheet when the demand outlook remains uncertain, industry and trading sources said.
"You worry about energy security and strategic reserves when supply-side issues dominate the headlines, but the current pandemic era is all about uncertain demand recovery ... no refiners and trading companies would want to see unwanted stocks piling up," said a gasoil and fuel oil marketer at PV Oil based in Ho Chi Minch City.
Driving activity and gasoline demand in Vietnam and other Southeast Asian countries have picked up in recent weeks amid easing movement restriction measures.
Driving activity in Vietnam recovered to above baseline levels in mid-March from 55% below baseline levels in February, according to mobility data from Apple. Activity was around 44% above baseline as of May 1.
As a result, Vietnam is expected to import more than 100,000 mt/month of gasoline throughout the second quarter, compared with 61,767 mt purchased in March, according to middle distillates distribution and trading sources based in Hanoi and Da Nang surveyed by Platts earlier this month.
"For trading companies that distribute and sell imported transportation fuels, they certainly don't want to set aside many reserve barrels because prices could come off and demand can crumble at any time as infection cases can surge without notice in these highly uncertain times," said a middle distillate distribution source based in Saigon.
There are currently 38 oil companies in Vietnam with official government permits to import oil products and holding rights to buy products from local oil refineries for both domestic distribution and overseas sales or exports, according to the Ministry of Industry and Trade.