* Short-term appetite for oil products has jumped
* That is pushing traders to take oil products out of storage
* Some are not renewing storage contracts
* Tank rates slip from few years ago
By Jessica Jaganathan
SINGAPORE, July 14 (Reuters) - Some energy traders in Southeast Asia are cutting their use of storage tanks as short-term demand for oil products soars, hitting companies that rent out storage at a time when many of them have just expanded their capacity.
Three traders told Reuters they have cut the amount of oil they hold in tanks or decided not to renew storage contracts in the past year.
A shift away from storage could potentially be bad news for tank operators running in the region like the Netherlands' Vopak and Oiltanking, a subsidiary of Hamburg-based Marquard & Bahls. Oiltanking declined comment, while Vopak did not immediately reply to a request for comment.
"Storage in this backwardated market makes no sense as we won't be able to recoup the costs to store the oil," said a Singapore-based trader in middle distillates, a group of oil products including gasoil and jet fuel.
Backwardation refers to a market where prices for prompt-loading cargoes are higher than for months further out, making storage uneconomical.
The trader, who declined to be identified as he was not authorised to speak with media, added that his firm had recently decided not to renew a short-term storage lease.
The Asian gasoil and fuel oil markets have been backwardated for most of this year.
The spread between the front-month and second-month gasoil contract climbed to an over three-year high of 50 cents a barrel this week, while the fuel oil spread is trading at parity, compared with about minus $4 a tonne at the same time last year.
To make money by holding oil products in tanks, the spread between gasoil prices for future months needs to be at about minus 60 to 70 cents a barrel or less to cover the cost of leasing tank space and borrowing the money to buy the fuel to fill it. And traders who are keeping some oil products in storage are putting pressure on tank operators to reduce rates, the sources said.
For instance, oil trader Glencore has reduced its storage lease volume of middle distillates, while oil trader Vitol may be giving up some tank space for fuel oil though discussions are still ongoing, the three traders said. Glencore declined to comment, while Vitol did not immediately respond to an email seeking comment.
Storage rates for middle distillates have dropped to about S$6.50 ($4.72) to S$7 per cubic metre from S$7.50 to S$8.50 around 1 to 2 years ago, while fuel oil tank rates have fallen to about S$5 to S$6 from S$6.50 to S$7 a few years ago, they said.
Many traders are also re-negotiating contracts to shorter time periods of six months to 1 year, from longer term contracts of 2 to 5 years previously, two sources from storage operators said.
Expanding capacity in the Johor Straits between Singapore and Malaysia has also put pressure on tank rates.
Oiltanking commissioned the Karimun terminal with a total storage capacity of 730,000 cubic metres in mid-2016, while Jurong Port and Oiltanking are building a 200,000 cubic metre storage facility in Singapore, to be ready by 2019.
Traders are also opting to store fuel oil in tankers as freight rates for very large crude carriers have halved from 1-1/2 years ago, the sources said.
"Tankers provide more flexibility as they can meet bunker demand quickly without having to load and unload in tanks," said a Singapore-based fuel oil trader. ($1 = 1.3769 Singapore dollars) (Reporting by Jessica Jaganathan; Editing by Joseph Radford)