January 12, 2015 10:55 am
Oil traders eye floating storage options
Anjli Raval, Oil and Gas Correspondent
Oil tanker©Bloomberg
“Sharks off the British coast: Oil tankers refuse to unload until prices rise?.?.?.,” railed an excitable British tabloid newspaper in 2009. The world’s biggest oil traders and investment banks had bought tens of millions of barrels of oil at cheap rates for storage on vessels, hoping to profit from their future sale at higher prices.
The slowdown in global demand during the financial crisis had created a world awash with oil, leading to a big “contango” structure in the crude markets — jargon for when prices for future delivery exceed current rates.
Six years later, similar conditions are emerging. Oil prices have plunged more than 50 per cent in the past six months amid a mounting surplus, prompting demand not only for onshore storage facilities but supertankers that can hold crude offshore for up to 12 months.
Vitol, Trafigura and Koch Supply & Trading are eyeing a return to this profitable trading gambit and are negotiating longer-term charter agreements, according to shipbrokers. Although these companies are not yet storing oil at sea, shipbrokers believe they will probably exercise the option to do so.
The trading arms of Royal Dutch Shell and BP are also looking out for opportunities, say people familiar with the matter.
All companies have declined to comment.
“Floating storage gives traders an opportunity to lock in an almost risk-free profit,” says George Johnson, in KPMG’s oil and gas division.
ICE February Brent — the international oil benchmark — at $48.80 a barrel stands more than $12 a barrel lower than prices for delivery in 12 months’ time. The US marker, West Texas Intermediate, is lower by $8.
Just a month ago, market conditions were not as favourable for storage at sea. “I don’t think there’s anywhere where you’d really be aggressively looking yet to float,” Ian Taylor, chief executive of Vitol, told reporters at the Platts Global Energy Outlook Forum in New York last month.
But since the new year, concerns of a large oil surplus of up to 2m barrels a day in the first half has only put pressure on prompt prices — futures contracts that are closest to expiration and usually for delivery in the next calendar month — and widened the contango, making storage plays more attractive, says Mr Johnson.
Rates for longer-term charters at under $40,000 a day for a 12-month contract — compared with current rates that are more than double — according to Gibson Shipbrokers, have also spurred enquiries.
Even though shipowners are in no rush to take on less lucrative floating storage business, market observers say, for traders a contango “carry” of just $8 a barrel for the next year for tankers containing 2m barrels of oil will mean the contents of the vessel will generate $16m over this period.
“The $44,000 a day they would then earn [in revenues] makes a storage play profitable,” says Simon Toyne, a maritime expert at Genscape. About 20m barrels are in floating storage, he says, compared with the 100m stored at sea in 2009. Freight rates are expected to fall and open up more opportunities, he adds.
But this time fewer players are able to take advantage of the contango structure. The absence of cheap financing has been a deterrent, while US regulators have raised the level of scrutiny into banks’ physical commodities businesses.
“Moving and storing certain physical commodities has in any event always been seen by some at the financial institutions as bringing with it an unjustifiable level of risk,” says one London-based energy lawyer. “The pressure from regulators has given increased weight to this view.”
Traders and the big, integrated oil companies that own or have easy access to storage facilities will look to storage plays first, market observers say. Some have suggested that corporates such as Shell or BP may be able to offset revenue hits from a lower oil price in parts of their business through their trading arms.
However, one senior oil trader says: “The sort of money you can make on a contango play is peanuts compared to the money you would make through, let’s say, the upstream business of an integrated oil company.”
“It’s a small tactical thing that will help pay the bills, but not bring a massive windfall for anyone,” he adds.
Storage plays, however, are likely to make reaching a price floor in oil more difficult as excess supplies are moved to alternative locations rather than used up by consumers, oil market observers say.
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In a presentation to Arab energy ministers Bassam Fattouh, director of the Oxford Institute for Energy Studies, said storage trades were among the “risks” facing Opec.
The cartel hopes lower prices will choke off some high-cost supply and again make way for higher prices. But the perception that storage is approaching the limit could lead to further sharp drops in the oil price, Mr Fattouh said.
The International Energy Agency has said the oil market is likely to “bump up against storage capacity” in the next six months, particularly in Europe. Moreover, the contango spilling over into refined products like gasoline, diesel and naphtha, will create an even bigger storage crunch, traders and oil analysts say.
Additional reporting by Gregory Meyer