Petrobras targets China's teapots with oil cargoes shipped to storage


By Florence Tan and Chen Aizhu

SINGAPORE, May 28 (Reuters) - Brazilian state oil company Petroleo Brasileiro SA PETR4.SA is shipping crude during June and July for storage in China to more quickly respond to demand from the country's independent refiners, two sources with knowledge of the matter said.

China is the world's biggest oil importer driven partially by demand from its independent refiners, known as teapots, centred in the eastern province of Shandong. Petroleo Brasileiro, or Petrobras, is seeking markets for its rising crude output and hopes to expand market share in China, where Brazil was the fifth-largest supplier in the first quarter of 2019.

Storing the oil will enable Petrobras to sell smaller parcels of oil promptly to the teapots, which account for about a fifth of China's crude import demand, and expand its customer base beyond state refiner China Petroleum and Chemical Corp, or Sinopec 600028.SS, the sources said.

"The idea for storage is to sell small parcels and to be more competitive in this market. The main thing is to have oil anytime," one of the sources said, adding that this will allow Petrobras to react to prompt demand.

Petrobras inked an agreement with Qingdao Port International Co in December to lease storage tanks at its joint venture Qingdao Shihua Crude Oil Terminal Co that can hold about 2 million barrels of oil, according to the sources and media reports at the time.

To fill those tanks, Petrobras has chartered the very large crude carrier (VLCC) Maran Cleo which is scheduled to arrive at Qingdao in Shandong on June 24. The VLCC contains 2 million barrels of Lula crude, part of which has been sold while the rest will go into storage, one of the sources said.

The producer has another VLCC that will arrive between July 10 and 15 at Qingdao that contains about 1 million barrels of Buizos crude for storage, he added. Buizos is a new medium-sweet grade that was first exported late last year.

The sources declined to be named as they were not authorized to speak to the media. Petrobras did not respond to a request for comment.

Qingdao Port International could not be reached for comment.

Spot premiums for Brazilian Lula crude delivered to China in August rose to a record of more than $4.50 a barrel to global benchmark Brent futures, its fifth month of gains, several trade sources said.

Prices climbed after U.S. sanctions on Venezuela led to higher demand for Brazilian crude in the United States and as Angolan exports declined and Russian oil supplies tightened in Europe.

A teapot executive based in the city of Dongying in Shandong said: "We've bought Brazilian oil many times, as it's a good replacement for all types of Angolan oil."

Currently the smallest cargo that Petrobras can deliver to China is 1 million barrels onboard a Suezmax-sized tanker and holding the oil in storage will allow the producer to sell cargoes of 300,000 or 500,000 barrels, the sources said.

"It's less stressful than taking one Suezmax. But price is a big issue since the market is in backwardation and if Petrobras needs to cover storage costs, the oil will be very expensive," a trader with a Chinese refiner said.

He was referring to the current market structure for Brent crude futures where prompt prices are higher than later-dated supply, meaning Petrobras will have to charge more to offset the declining value of the oil over time.

INTERACTIVE GRAPHIC: China's crude oil imports from Brazil

China's crude oil imports from Brazil

(Reporting by Florence Tan and Chen Aizhu in SINGAPORE; Additional reporting by Gram Slattery in RIO DE JANEIRO; editing by Christian Schmollinger)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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