Logistics driving storage

 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.

http://thismatter.com/money/futures/futures-prices-expected-spot-prices.htm 

http://www.tankeroperator.com/ViewNews.aspx?NewsID=7457

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. 

Oil Well Jerkerline Powerhouse

Contango plays could eventually arise in the VLCC tanker market says shipbroker

http://www.hellenicshippingnews.com/contango-plays-could-eventually-arise-in-the-vlcc-tanker-market-says-shipbroker/

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

Brent sinks on stockpile fears, output freeze doubt

http://www.cnbc.com/2016/03/09/oil-prices-dip-as-global-oversupply-outweighs-strong-demand.html

Oil prices fell on Thursday, with U.S. crude retreating from three-month highs as refinery maintenance threatened to raise record inventories of crude and sources said an OPEC production freeze meeting was unlikely without Iran's participation.

An initial rally in the dollar after the European Central Bank cut its key lending rate to zero also pressured oil, although crude prices recovered from their lows as the euro rebounded on ECB comments that more cuts were unlikely. 

Brent crude futures were down $1.32 at $39.75 a barrel by 11:30 a.m. ET (1630 GMT), having earlier this week peaked at $41.48, the highest level since Dec. 9. 

U.S. crude fell $1.07 to $37.22 per barrel, having hit $38.51 on Tuesday, also its highest since Dec. 9. 

Oil market rally could 'rip people's faces off'

 

But some analysts said on Thursday last week's gasoline stock build, which was triple expectations, could be partly due to the market transitioning from winter-grade to summer-grade motor fuel. They also said the U.S. refinery maintenance season could push crude stockpiles to even bigger highs.

Global demand for crude oil typically dips when refineries around the world enter seasonal maintenance in spring, ahead of peak summer demand.


Prices rose as much as 5 percent on Wednesday, after a big gasoline inventory drawdown in the United States overshadowed record-high crude stockpiles. But analysts warned that a global crude production overhang of more than 1 million barrels per day (bpd) showed few signs of abating.


"It looks like the market is still ignoring crude inventories," said Scott Shelton, energy broker at ICAP in Durham, North Carolina.

The focus lies on a potential agreement to rein in output between producers from the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, and non-OPEC exporters including Russia.


A meeting between oil producers to discuss a global pact on freezing production is unlikely to take place in Russia on March 20, sources familiar with the matter say, as OPEC member Iran is yet to say whether it would participate in such a deal.

"The idea that meeting may not happen at all is definitely weighing on the market," said Tariq Zahir, who mostly trades in U.S. crude oil spreads at Tyche Capital Advisors in New York.

Kilduff: Oil rally will end soon

 

Most analysts expect the oil glut to last into 2017 or even 2018, resulting in low prices. 

Only by 2020 is there a consensus for prices to rise towards $70 a barrel, based on low investment in production. 

The European Central Bank cut all three of its interest rates and expanded its asset-buying programme on Thursday, delivering a bigger-than-expected cocktail of actions to boost the economy and stop ultra low inflation becoming entrenched. 

Surprising markets, it cut its main refinancing rate to zero from 0.05 percent.

NNPC NNPC to be Split Up

http://www.petroleumafrica.com/nnpc-to-be-split-up/

As part of the Nigerian government’s bid to transform its state-run oil and gas firm, Nigerian National Petroleum Corp. (NNPC), the firm is to be broken up into 30-revenue generating companies. Speaking at the 25^th Oloibiri Lecture Series and Energy Forum in Abuja, Minister of State for Petroleum Resources and Group Managing Director of NNPC, Dr. Ibe Kachikwu, said that the companies would have separate managing directors.

“For the first time, we are unbundling the subset of the NNPC to 30 independent companies with their own Managing Directors. Titles like Group Executive Directors are going to disappear and in their place you are going to have Chief Executive Officers and they are going to take responsibilities for their titles. At the end of the day, the CEO of an upstream company must deliver an upstream result,” Kachikwu stated.

He went on to say that the state-run firm had made up some of its losses, moving a little bit nearer the red, going from N160 billion to N3 billion in January. Kachikwu added that by the end of the year NNPC should start seeing a profit.

Old-School Ways Beating Oil Rout in Birthplace of Petroleum Age

• Charlie Fairbank pumps crude where the Petroleum Era began
• Low costs, established infrastructure keeps wells churning 

http://www.bloomberg.com/news/articles/2016-03-08/old-school-ways-beating-oil-rout-in-birthplace-of-petroleum-age

Charlie Fairbank, the great grandson of one of the world’s first oilmen, has turned to a century-old technology to keep his 350 Ontario oil wells competitive in a world of $35 crude.

Charlie Fairbank

Source: Fairbank Oil Fields

Using a single engine and wooden jerkers -- rods that connect to multiple pumps -- Fairbank is producing the same 65 barrels a day his family has been extracting since the 19th century in Oil Springs, birthplace of the Petroleum Age. It’s there that asphalt seller James Miller Williams struck oil in 1858, a year before Edwin Drake drilled his famous well in Titusville, Pennsylvania.

“If careful, we got another 100 years,” Fairbank, 74, said in a phone interview from Oil Springs, about 145 kilometers (90 miles) from Detroit. “We use old wooden jerkers that bring down maintenance costs considerably.”

While Ontario fortunes as a world oil center have long faded, small producers such as Fairbank are demonstrating a rare resilience amid the lowest prices in a decade. Crude production in Canada’s most-populous province will rise about 14 percent this year, albeit to just 1,214 barrels a day, according to the National Energy Board. That’s expected to be the biggest increase of any province as wells are shuttered from Alberta to Saskatchewan.

Lake Erie

Oil and gas in Ontario is pumped from about 2,500 wells dotted along the coast of Lake Erie, many producing less than a barrel a day, Frank Kuri, president of Ontario Petroleum Institute, said. Some wells have been producing for more than a century and oil can be pulled from the ground for as little as $10 a barrel, he said.

Fairbank’s pumpjack and jerker line system

Source: Fairbank Oil Fields

While many Ontario producers are small private companies such as Fairbank Oil Fields, there’s a few publicly listed firms producing there, including Toronto-based Dundee Energy Ltd, Simcoe-based Metalore Resources Ltd. and the Abu Dhabi National Energy Co.’s TAQA North.

Close-to-the-surface crude, low royalty rates and well-developed infrastructure helps keep costs in the province low, according to Kuri. Royalty rates are about 13 percent versus as high as 40 percent in Alberta, and unlike in other parts of Canada, a large portion of onshore mineral rights are privately held.

As Alberta producers struggle to get pipelines built to deliver their crude to markets, Ontario oil companies are close to major fuel markets. Producers ship most of their crude by truck to the nearby Imperial Oil Ltd. refinery in Sarnia with some going to the American Refining Group Inc.’s plant in Bradford, Pennsylvania, Kuri said.

Profitable Oil

Low oil prices may even help stimulate interest as companies look toward regions where oil can be produced profitably, even at lower volumes, said Hugh Moran, executive director of OPI.

“When prices started to drop, I got calls from industry folks indicating that this could be good for Ontario,” Moran said in a phone interview. “When you look at the Bakken, the costs are immensely higher than here,” he said, in reference to the large producing region in North Dakota and Saskatchewan, where break-even prices range from $30 to $65 a barrel.

While $30 may not be high enough to stimulate exploration, $45 is adequate, Moran said. Kuri estimated that crude output could be boosted back to 5,000 barrels a day, the peak reached in 1995. The Utica shale, which extends under parts of Ontario, is untested but may prove lucrative further into the future, he said.

Four Days

Brent crude has advanced more than 40 percent since slumping to a 12-year low in January. The global benchmark closed above $40 a barrel for the first time since December on Monday, capping the longest run of gains in three months, and settled at $39.65 on the London-based ICE Futures Europe exchange on Tuesday.

Drillers would have to be hungry. The province has established and potential oil reserves of only about 40 million barrels, according to data from the Ontario Oil, Gas & Salt Resources Library. That’s roughly equal to four days of Saudi production and compares with as much as 166 billion barrels of reserves in Alberta’s oil sands, government data show.

Fairbank is ever optimistic. “I do believe there is a lot of oil to be discovered in Ontario,” he said. But making money isn’t all that matters, he said. “We are very ancient and historic,” he said. “We are trying to pay homage to what has gone before and created this industry.”

Refinery Demand Cuts Drive St. James Crude Stocks to Record High

http://www.genscape.com/blog/refinery-demand-cuts-drive-st-james-crude-stocks-record-high 

Dylan White and Amanda Fairfax Dirkes, Oil Analysts

Crude stocks in St. James, LA, climbed 1.9mn bbls to a record high the week ending February 26, 2016 and could continue to increase if crude demand falls further at U.S. Midcontinent refineries that source crude from the U.S. Gulf Coast.

The week ending February 26, 2016, stocks in St. James were about 1.0mn bbls higher than the previous record-high set November 20, 2015, according to Genscape. A refined products glut in the Midcontinent has led to decreased refinery run rates there and in part caused tanks at St. James to fill. For example, Valero Energy cut production at the Memphis refinery in early February to combat relatively weak profits, according to market sources. Sources at the time estimated the refinery may decrease crude processing by 25 percent.

St. James crude stocks (mn bbls). Click to enlarge

The St. James storage build week ending February 26, 2016 coincided with decreased outgoing crude pipeline volumes. Flow rates declined 88,000 bpd to 225,000 bpd on the Marathon-operated 1.2mn bpd St. James-to-Patoka, IL, Capline Pipeline, which feeds Valero’s Memphis refinery. The refinery consumes up to 195,000 bpd of light sweet crude from and outputs exclusively light products.

 

A Valero spokesperson declined to comment on refinery operations.

Capline weekly average flow rates for the week ending February 26, 2016 marked the lowest utilization since October 30, 2015, supporting decreased run rates at the Memphis refinery.

The storage build at St. James was also likely influenced by a weaker Louisiana Light Sweet differential. The return of a major seller to the Louisiana crude market caused the differential for Gulf Coast benchmark LLS to decrease slightly over the week ending February 26, 2016, as it was heard to trade at WTI plus $2.40/bbl last on February 28, 2016. The prior week, LLS was assessed at WTI plus $2.55/bbl.

Genscape's St. James Supply Hub Report provides a comprehensive look at the factors driving the state of play in this key hub every Tuesday at 10am ET. Get unrivaled insight into highly accurate crude oil storage levels at St. James. Click here to request a free trial.

Additionally, Genscape's North American Refinery Intelligence Service gives subscribers a comprehensive view of refinery utilization by product class around the U.S. and Canada. To learn more or request a free trial of the service, click here.