Traders continue to keep a watchful eye to take advantage of any opportunities to exploit contango play, but (so far) the synergies required to make this happen remain elusive. Even short term contango employment is hard to square as all of the dynamics required for this to happen need to move together. For the time being, floating storage demands will continue to rely upon to logistical problems. However, the issue is not going away, it’s just got parked in another place. The recent announcement by a handful of OPEC members and Russia not to increase production has done nothing to ease the current oil glut which translates into doing little to stem the downward pressure on the oil price other than a temporary uplift.
According to Gibson, “for contango based floating storage play to take place, the discount in oil prices for prompt delivery has to deepen relative to forward assessments, a drop in timecharter rates would also help. The last significant floating storage took place 2009-10 when we witnessed a very different scenario from what we are seeing today. Back then the world had just entered into the economic slump following the banking collapse in the autumn of 2008. As a result, OPEC was continually revising oil demand as the crisis took hold. On the supply side 2009-10 saw 113 VLCCs delivered as a result of the glut of ordering through the tanker market boom years 2005-08 when we believed that the BRIC economies would drive forward crude demand. Following the banking collapse, floating storage cushioned the impact of the tonnage surplus, providing owners with an additinal income stream ahead of the recovery albeit at ‘more challenging’ time charter rates. Back in 2009/10 the average 1 year VLCC timecharter rate was around $37,500/ day”, said the shipbroker.
Gibson notes that “today’s picture is very different. Crude production is at record levels, with no indication of a slow down. While US production is slowing, crude stocks levels in the US are at their highest since records began. Back in 2010 (Jan-Apr), most floating storage took place in the Gulf of Mexico, not surprisingly, today there is none. Today, floating storage is mostly for operational reasons (not contango based) or in the long term fuel oil storage hub in the Singapore/Malaysian region. Also there is some limited storage in the Middle East Gulf, in addition to the Iranian NITC positions. On the supply side, we have witnessed only moderate fleet growth over the past year or so which has notably lifted timecharter rates. Of course, the strength of the tanker market since the oil price shock commenced in June 2014 has led to more brisk investment which will result in a spurt in fleet growth starting in the second part of this year”.
According to the shipbroker, “naturally owners are keen for the return of this phenomeon, particularly if the crude tanker spot market continues to soften, with the resulting influence on timecharter rates. Owners will continue to pursue storage options in their charterparties, as they did in January 2015. Very few of these options actually ended up loading cargo to store. However, if overproduction persists and the delivery profile impacts on spot rates, we could witness an increase in demand for floating storage in the second half of this year – but will it be contango based play? Either way, whether contango floating storage materialises or not, whilst prompt oil prices remain below the forward assessments, this sets the floor to short term VLCC rates”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide