Floating storage profits surge as oil price collapse widens contango
The contango in oil markets — when the future price is higher than the spot price — is so steep that floating storage economics have never been so favourable
THE historic collapse in oil prices amid a global shortfall of commercial land-based storage leaves floating storage on tankers as one of few viable options to address the unprecedented oversupply of crude overwhelming the market.
Stocks in listed tanker companies surged this week on expectations that producers will turn to the global fleet to store unwanted crude, as oil trades at the lowest levels in a generation.
The crash in prices means that the contango in oil markets — when the future price is higher than the spot price — is so steep that floating storage economics have never been so favourable.
The six-month spread of $13.19 per barrel between the June and November contracts for Brent crude can yield profits of as much as $17m over a six-month period of floating storage, Lloyd’s List analysis shows.
Teekay Corp, Frontline, Scorpio Tankers and Hafnia were among the larger tanker owners listed on New York and Olso exchanges that saw shares spike by as much as 25% since Friday as West Texas Intermediate crude traded in negative territory this week.
Demand for very large crude carriers and suezmax tankers for floating storage has been long hyped since the apparent size and scope of the coronavirus-led contraction in crude demand became apparent last month.
Yet while floating storage, defined as tankers at anchor for 20 days or more, is at the highest levels in records going back to 2009, the much-anticipated wave of chartering by oil traders has yet to fully materialise.
Some 160m barrels on 110 tankers is tracked storing crude according to Lloyd’s List Intelligence.
That includes 56 VLCCs from the global fleet of 790. Some 38 in floating storage are owned by Iran’s national shipping company and unable to trade because of US sanctions.
In addition to these numbers, tankers are now taking longer routes around the Cape of Good Hope to extend voyages, or face longer discharge delays in port because of storage issues.
There are also greater numbers of unsold or distressed cargoes. These figures are not immediately apparent in floating storage data, although if delays persist, they will be eventually added to the tally.
Back in 2009, the last time when collapsing crude demand triggered floating storage, some 54 VLCCs were tracked in floating storage, a much higher percentage of the total VLCC fleet, which then numbered around 500 vessels.
The oil market tipped into prolonged contango 11 years ago after the Lehman Brothers collapse triggered a global recession, reducing oil demand and leaving spot prices much lower than the forward contracts.
However, the scale of that collapse is incomparable to today. With land and air transport worldwide paralysed by the global lockdown, a third of the 100 million barrels per day global consumption has been wiped out, sending crude prices spiralling even lower and the contango even stepper than back in 2008 and 2009.
There are estimates that commercial storage will be exhausted by next month in the US, unless the Trump administration allows commercial leasing of its Strategic Petroleum Reserve. There are other anecdotal reports that major storage hubs, including the Amsterdam-Rotterdam-Antwerp area, is also likely to reach capacity during the next eight weeks.
In 2009, when less dramatic conditions promoted floating storage, tankers were concentrated at anchor off Southwold, on the English eastern coast. Ship tracking data shows a handful of tankers in the area.
The current global crude oversupply — with the surplus in the US along building by 2m barrels daily — now has oil futures on track for a floating storage bonanza unless other alternatives are quickly found.
On today’s calculations, oil traders who buy oil on the spot market at current prices and take a futures position for its sale in six months can make substantial profits at today’s current rates for six-month and 12-month period charters.
Floating storage calculations, based on the latest Brent prices — which fell $6 per barrel on Tuesday to just over $20 — place the cost of buying and storing 2m barrels over six months at $2.09 per barrel a month, excluding carry and insurance costs.
The June contract was priced at $20.22 per barrel and the November at $13.19 per barrel, this yields a profit of $17m, based on data compiled by Lloyd’s List. That is based on the total $49.7m cost of buying the crude ($40.4m) and floating storage ($9.78m). The assumed cargo value at the end of the deal is $66.8m.
Brent crude is used as the international benchmark for crude pricing. West Texas Intermediate, which traded below zero today, features contracts requiring physical delivery at expiry to the landlocked Cushing, Oklahoma.