05-08-2016

Oil Traders See Glimmer of Profit Ahead in Storing Crude at Sea

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profit from floating storage. But with front-month futures sliding since early June and tumbling into a bear market this month amid swelling onshore stockpiles, the market structure has changed while freight has also become cheaper.

“Demand from refineries looks set to pick up towards the end of the year as more units return from peak maintenance season,” said Nevyn Nah, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “It’s not a bad time for traders to start thinking about floating certain grades of oil as the current Brent structure and freight are helping their cause.”

A six-month time charter on a Very Large Crude Carrier that can carry about 2 million barrels of oil would cost $25,000 to $28,000 a day, according to two shipbrokers and a tanker charterer. That’s equivalent to $2.25 to $2.52 a barrel. October Brent futures traded at $42.75 a barrel on Thursday, lower than the April 2017 contact at $45.44 on the London-based ICE Futures Europe exchange.

Crude Varieties
Most varieties of crude from Africa, North Sea and the Asia Pacific region are priced off the Dated Brent benchmark, meaning traders can potentially benefit from holding on to such grades at sea. Apart from freight, storing crude on tankers would also involve costs including that for ship fuel, insurance and finance.

Hoarding varieties of oil that are priced off the Middle East benchmark, Dubai crude, may not be viable. That marker’s six-month contango is at $2.05 a barrel, according to data from PVM Oil Associates Ltd. That doesn’t cover the cost of hiring a ship for half a year.
“Sentiment in the VLCC sector is weak due to lower chartering demand from West Africa and to a lesser extent, the Middle East,” said Den Syahril, a Singapore-based analyst at industry consultant FGE. “Furthermore, the wave of new-build tonnage hitting the market this year has added to the vessel surplus and pressured rates lower.”

A drop in freight rates as new ships enter the market and shrinking availability of traditional storage options “may be prompting creative approaches to holding on to oil,” industry consultant JBC Energy GmbH said in a report last month. Additionally, the deepening contango has made floating storage relatively attractive for some companies, it said.

Source: Bloomberg

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