Friday, March 11, 2016

Logistics driving storage

Diagram showing how future prices change as the delivery date approaches according to the expectations hypothesis, and if contango or normal backwardation prevails.
 Normal backwardation exists when the price of futures contracts is below the expected delivery date spot price. Prices for contracts with nearer maturity dates are higher than those with later maturities. Contango exists when the price of futures contracts is higher than the expected spot price on the delivery date, and the price of futures contracts with later delivery dates are higher than those with sooner delivery dates.

For the time being, floating storage demands will continue to rely on logistical problems, despite traders keeping an eye out for contango opportunities.
Short term contango dynamics were not in place during the first week of March, UK broking house Gibson reported.

However, the storage issue has not gone away. Some OPEC members and Russia have agreed not to increase production, but this has done nothing to ease the current oil glut, which will do little to stop the downward oil price spiral, apart from temporary hikes.

For any contango-based floating storage to occur, the oil price discount for prompt delivery has to deepen relative to forward assessments, while a fall in timecharter rates would also help, Gibson explained.

The previous significant floating storage took place in 2009/10 when a very different scenario to that of today was seen. Back then, the world’s economy had just entered the economic slump, following the banking collapse of Autumn 2008.

As a result, OPEC was continually revising oil demand as the crisis escalated. On the supply side, 2009/10 saw 113 VLCCs delivered, as a result of the ordering spree driven by the tanker boom in 2005/08 when it was thought that the BRIC economies would drive crude demand.

Following the banking collapse, floating storage cushioned the impact of the tonnage surplus, which provided owners with additional income ahead of the recovery, albeit at more challenging timecharter rates. In 2009/10, the average 12 months T/C rate was around $37,500 per day.

Today’s picture is very different with crude production at record levels with no indication of any slowdown. US production is slowing but here crude stock levels are at their highest since records began.

During January-April, 2010, most of the floating storage activity was seen in the Gulf of Mexico, while today there is none- not surprisingly, Gibson said. Today most of the floating storage is undertaken for operational reasons and is not contango based, or to create the fuel storage hub in the Singapore/Malaysia region. There is also a limited amount of storage in the Middle East, in addition to the NITC position.

On the supply side, only moderate fleet growth has been seen over the past year or so, which has notably lifted T/C rates. However, the tanker market’s strength since the oil price demise started in June 2014, has led to more investment, which will result in an increase in the fleet starting from the second half of this year, Gibson warned.

Naturally, owners are keen to see a return of the contango storage play, particularly if the crude tanker spot market continues to soften, with the knock-on effect seen in timecharter rates.

Owners will continue to pursue storage options in their charterparties, as they did in January of last year. However, very few options included loading crude for storage but if over production continues and the higher delivery profile impacts on rates, an increase in storage demand could result in the second half of this year.

Will it be a contango-based play? Whether contango floating storage materialises or not, whilst prompt oil prices remain below the forward assessments, this sets the tone for short term VLCC rates, Gibson concluded. 

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