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DUBAI (Bloomberg) –The coronavirus that’s throttling fuel demand and forcing global producers to make unprecedented output cuts has left markets awash in so much crude that even the Middle East’s main oil-trading hub has run out of room to store unwanted barrels.

Terminal operators at Fujairah in the United Arab Emirates say they’re turning down requests from traders and refiners to store crude and refined products, whereas a year ago they had ample space. The port’s 14 million barrels of commercial crude-storage capacity is just a fraction of what Saudi Arabia and Abu Dhabi provide for their state oil companies.

Without tanks to lease, traders face costly constraints on their role as matchmakers who link a specific supply here with a willing buyer there. The global oil glut is making it harder for traders to even out imbalances in the market, and the plunge in crude, down about half this year, is making matters worse.

“If tanks are leased or blocked, then traders need to push back on taking crude,” said Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai. That, in turn, could force production in some places to halt, he said.

Demand for storage, an unglamorous but essential link in the global energy supply chain, is at its highest in years. From Singapore to Cushing, Oklahoma, tanks are brimming with crude, gasoline and other products, nowhere moreso than in Fujairah, a gateway for shipments from the world’s most prolific oil-producing region.

“The current capacity isn’t enough, for sure,” said Malek Azizeh, commercial director at Fujairah Oil Terminal FZC.

Even a deal between oil producers to trim global output by about a tenth won’t ease the storage crunch at Fujairah. The Organization of Petroleum Exporting Countries and partners such as Russia finally agreed on Sunday, after four days of deliberations, to cut production by 9.7 million barrels a day. Other nations, including the U.S. and Canada, expect to pump less because crude prices are too low for some of their oil companies to make a profit.

While a cut of this size would partly offset lost crude demand, it would fall short of OPEC’s own estimate for the drop in consumption. Trafigura Group sees oil use plunging by as much as 35 million barrels daily — roughly a third of normal global output — as countries prolong lockdowns over the coronavirus.

Fujairah, which hugs a ribbon of coastline between the craggy Hajjar Mountains and the Gulf of Oman, cemented its position in the world’s oil-storage and supply network over the last 30 years. It started out as a refueling station for tankers shunting crude from the Persian Gulf to refineries in China, the U.S. and elsewhere. It also built tanks where traders could stockpile fuels.

As state producers Saudi Aramco and Abu Dhabi National Oil Co. boosted refining capacity and started their own trading units, Fujairah’s storage operators benefited from the increasing volumes of crude and refined products flowing to and from the Gulf. Now that refineries are processing less crude and many of the world’s vehicles and aircraft are at a standstill, those regional flows have dwindled.

Stockpiles of fuel oil and other heavy distillates at Fujairah swelled more than 30% in the past year to 15.4 million barrels, according to the Fujairah Oil Industry Zone, which oversees the city’s terminals. Local authorities don’t provide inventory data for crude oil.

Two projects to add more than 62 million barrels of storage won’t be built until next year at the earliest.

“We are going to run out of storage because the demand declines are so steep,” Amrita Sen, chief oil analyst at Energy Aspects, said in a Bloomberg Television interview.

By ANTHONY DI PAOLA AND VERITY RATCLIFFE on April 13, 2020

Photo by Kevin Harris on Unsplash

The take-up of tankers hired for both clean and dirty floating storage is yet to reach the levels forecast last month, when the size and scale of the crude demand collapse stoked fears that land-based storage was strained and the crude price plunged to 18-year lows

Short-term time charter deals are unlikely to immediately materialise this week as everyone in the oil industry waits to see whether production will be curbed to let prices rise again

GLENCORE and Trafigura are leading global oil traders chartering long range two tankers for storage of refined products amid an accelerating global surplus of gasoline, jet fuel, and diesel.

But further short-term time charter deals are unlikely to immediately materialise this week, after the world’s key oil producers led by Russia, Saudi Arabia and the US signalled a possible agreement to curb global crude production by as much as 15%.

ST Shipping, the transport entity for Glencore, chartered two tankers for between 120 days and 180 days’ storage last week, according to reports from shipbrokers. Royal Dutch Shell and Litasco — Lukoil’s marketing arm — were also identified as each chartering an aframax-sized ship for periods of three to six months over the past seven days.

The take-up of tankers hired for both clean and dirty floating storage is yet to reach the levels forecast last month, when the size and scale of the crude demand collapse stoked fears that land-based storage was strained and the crude price plunged to 18-year lows.

“All time-charter deals of storage and contango plays either failed or are being scrutinised very carefully,” London shipbroker Braemar ACM said in its weekly emailed report.

“It is not all doom and gloom, despite oil cuts in production signalling less tanker demand. The oil will have to go somewhere, global storage tanks are filling up and refiners are reportedly turning away additional barrels as demand for refined products from petrol to jet fuel takes a hit.”

With any decision on a production cut between the key countries now postponed until Friday, further deals await clarification on whether oil producers will agree to curb record output.

Some 130.9m barrels of crude is currently tracked in short-term storage of 20 days or less on 93 tankers, according to data from Lloyd’s List Intelligence. That’s close to the record of 131.6m barrels tracked two weeks ago.

However, the figure is inflated by Iran’s national tanker fleet, National Iranian Tanker Co, which cannot trade due to US sanctions and is storing crude and condensate on its tanker fleet, which includes 36 very large crude carriers.

Middle distillate markets are broadly in contango, when the future price is higher than the spot price, with traders able to buy now and take a futures position for sale at a profit, while placing the physical cargo in storage. Jet fuel and gasoline have plunged in price as demand for air and land transportation has collapsed, with onshore inventories quickly rising.

“If you are able to find free tank capacity now you can make a fortune,” said Insight Global, in an April 2 report into the onshore tank industry. Commercial tank capacity at the Amsterdam-Rotterdam-Antwerp, US Gulf coast, Fujairah and Singapore hubs was around 75%, the Netherlands-based petroleum research company said. It would take almost four months for tanks to “reach tops”, assuming a 10m bpd drop in demand, according to the report.

LR2 rates have soared on the benchmark route to Japan, amid floating storage speculation. Earnings to ship 90,000-tonne cargoes of refined products from the Middle East Gulf. To Asia are equivalent to $65,500 daily according to the Baltic Exchange. This rate was at $4,000 daily in late January, before coronavirus was declared a pandemic.

Average rates gained 20% for larger product tankers over the week ending April 3, with increases of 5% seen for smaller, medium range tankers, which dominate the sector.

Of the 25 aframax period charters reported for 12 months or less over the past two weeks by oil traders, three directly reference the fact that they will be used for floating storage. A further 11 vessels were hired for periods ranging from 30 to 60 days, or up to 180 days, suggesting they could also be used by this purpose.

Rates to take aframax tankers for short-term periods were reported as high as $45,000 and $50,000 daily. Litaso chartered the LR2 Elka Athina for 150 to 180 days floating storage, while Shell’s shipping arm paid $50,000 to charter the Fos Athens for 60 to 120 days, and $52,000 daily to extend that to 180 days after the first four months.

From Michelle Bockmann published April 6, 2020

The price of crude has dropped to levels that we have not seen in a generation. The driver for this has been the disagreement between Russia and Saudi Arabia about decreasing production by 1.5 million barrels per day and instead increasing production by about 2 million barrels per day.

The global demand for oil until recently was about 100 million barrels per day. After nearly five years of oversupply, supply had finally come into close agreement with demand.

COVID-19 is adding another, and by most accounts a more serious complication, and one that will last longer.

The impact of COVID-19 has been vastly underestimated by agencies such as the International Energy Agency. They had recently suggested that demand might drop by 90,000 barrels per day; that compares to a prediction in December 2019 that demand would go up by 900,000 barrels per day.

A recent estimate by IHS Markit suggests that we might be in for a bigger shock. They predict that gasoline consumption in the US will drop by 55% for March and April due to COVID-19. They also indicated that jet fuel demand would be halved over the same period. Lastly, they suggest that diesel demand would be down by 20%.

What does this mean? In 2019, the US consumed 20.5 million barrels of crude oil per day. How was that crude oil consumed? On average, 45% of each barrel goes towards making gasoline; 25% towards diesel; 9% towards jet fuel and kerosene. The remaining 21% goes to heating oil, residual fuel, feedstock for plastics manufacturing and other products including paints, resins, etc. If the IHS numbers are correct, then COVID-19 would result in US demand for crude oil dropping to 12.5 million barrels per day. That’s a drop of a whopping 8 million barrels per day of crude oil, or 8% of global crude production!

However, refineries don’t work that way. They take in a staple diet of crude oil and churn out products in roughly the same proportion. Changing the output proportions would cause significant disruptions to refinery operations. Since diesel’s demand is least impacted because of its use in freight transport and will control refinery output, we anticipate that the crude consumption by the US will instead drop by 4 million barrels per day. But this will be accompanied with the rapid growth of inventories for gasoline and jet fuel, at rates of 30% to 35% of average daily consumption accumulating in storage tanks. Should COVID-19’s direct effects on the demand in the US last for two months (roughly how long it took China to start the recovery process), we would have built up additional reserves of gasoline and jet fuel that would last at least an additional month.

With the exception of China, the rest of the world’s economy, notably Western Europe and to a lesser extent South Korea and Japan, is under similar stress as the US economy. China has started to slowly recover after four months of economic pain. Given that, we anticipate that world demand for crude oil is probably down more than 10 million barrels per day, or down more than 10% from last year’s average consumption and production. The additional amount of crude being added into the market by Saudi Arabia and Russia will exaggerate this oversupply. The inventory of crude and refined products will continue to grow, so this oversupplied situation will persist for months after we have overcome the COVID-19 crisis.

It is no wonder that the Texas Railroad Commission, which oversees oil and gas production in Texas, and the US government are considering intervening to slow this inventory buildup using mechanisms not employed in at least 50 years. The Texas Railroad Commission is contemplating restricting production from the state’s oil fields and therefore putting its thumb on the price of oil – a role it had held until the OPEC-led price shock in the 70s. Similarly, the US government is contemplating barring imports of oil, a position it has not taken since the late 50s. While these are unusual times, such measures are unlikely to change the continued depressed price of crude and refined products that exist now and that will exist well after the COVID-19 crisis starts to recede.

We in Texas are looking at lower-for-longer for crude oil no matter what the Saudis and Russians do. And with the buildup of refined product inventories, the refining industry will continue to be depressed.

From Ramanan Krishnamoorti, Chief Energy Officer, March 22, 2020 (Forbes), Photo by Martin Sanchez on Unsplash

UK businesses under threat of cashflow pressures because of coronavirus crisis

Financial markets face another volatile week as the escalating coronavirus crisis tips the global economy into a downturn that some companies will struggle to survive.

With France, Spain and Italy in lockdown, a sharp eurozone recession looks inevitable – despite shock emergency action by the US central bank on Sunday night. And while falling share prices captured the headlines last week, analysts believe a corporate debt crisis is building as global growth goes into reverse.

Fears of a cashflow crunch are also rising as self-isolating consumers shun shops and restaurants, and travel links are curbed.

“We cannot underplay the challenge at hand here. A huge proportion of UK businesses face significant cashflow pressures and without cash firms can’t survive for long,” Karim Haji, the head of financial services at KPMG UK warned.

“Banks’ margins are already squeezed, asset managers are especially vulnerable to the current market situation and insurers face the potential double hit of increased claims and decreased portfolios.”

MSCI’s All-Country World Index, the broadest measure of global stock markets, plunged by 12.4% last week, its heaviest losses since Lehman Brothers failed in 2008.

In a late revival, Wall Street surged by 9% on Friday afternoon after Donald Trump finally declared a national emergency over Covid-19.

And on Sunday night, the US Federal Reserve slashed interest rates to nearly zero, as part of a co-ordinated move by central bankers to protect the global economy. The move lowers borrowing costs to their crisis-era low of between 0.0% and 0.25%.

In a coordinated effort to see off a potential global economic crisis, the central bank also said it was working with the Bank of England, the European Central Bank and others to smooth out disruptions in overseas markets.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s rate-setting committee said in a statement. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”

But despite central bankers stepping in, airlines face a fight for survival as countries impose flight curbs.

“The shock decision to suspend flights between Europe and the US is about to take a heavy toll on the airline operators but it could be just a warm-up for what is to come now that Spain has declared a state of emergency because of the spread of Covid-19,” Matt Weller of Gain Capital said.

Middle East markets, which traded on Sunday, fell broadly. Egypt’s main share index tumbled by 7%, with Dubai falling 4%.

The sports retailer Nike is closing all its stores in the US, Western Europe, Canada, Australia and New Zealand for more than a week to try to curb the spread of the coronavirus, a reminder of the economic damage being caused.

Corporate bond prices have also come under heavy pressure since the coronavirus crisis began, amid rising fears that firms will default on their debts. Bonds issued by the travel industry, such as the US car-rental company Hertz, fell sharply last week.

“This certainly is another match being lit [near] the bonfire of corporate debt liabilities,” Simon MacAdam, a global economist at Capital Economics, told CNN. “There’s definitely potential for systemic risk.”

Analysts at Nomura predict the eurozone economy will shrink by at least 1.5% in April-June and contract by 0.8% during 2020 as a whole.

After three weeks of losses, some investors are looking for signs that the slump is bottoming out. But without effective, coordinated action, stocks and bonds could slide again – potentially adding to the 29% losses suffered by the UK’s FTSE 100 so far this year.

G7 leaders will hold a conference call on Monday to discuss the crisis – a chance to agree new measures to protect their economies. But the US treasury secretary, Steven Mnuchin, played down the suggestion the US could be falling into recession. insisting coronavirus will be a short-lived problem.

“Later in the year, obviously, the economic activity will pick up as we confront this virus,” Mnuchin told ABC.

The coronavirus pandemic has also hurt Saudi Arabia’s state-owned oil giant. Saudi Aramco promised to cut its spending this year to weather the coronavirus pandemic, after revealing on Sunday that its oil revenues fell by more than a fifth last year because of lower oil prices.

Aramco reported a worse than expected net profit of $88.2bn (£69.9bn) in 2019, down from $111.1bn in 2018, because of lower oil prices. The world’s most profitable company said it plans to spend between $25bn to $30bn this year, down from $32.8bn last year, after the Covid-19 virus wiped out oil demand forecasts for 2020.

The benchmark oil price averaged $64.26 a barrel last year, down from $71.34 a barrel the year before. The current price is below $34 a barrel and is forecast to remain low as the virus threatens a global economic recession.

The oil markets recorded their steepest price drop since the 1991 Gulf war, to lows of $33 a barrel last week, after Saudi Arabia waged an oil price war against rival “petro-nations” by vowing to ramp up oil production to record highs.

The kingdom instructed Aramco last week to raise the maximum rate of oil it can comfortably produce to 13m barrels of oil a day to secure its market share against rising oil exports from Russia and the US.

The Guardian (March 15, 2020)

The combination of a massive demand shock caused by the coronavirus outbreak and an unprecedented supply shock after OPEC and its allies failed to agree new production cuts has thrown the oil market off-kilter with prices trading close to four-year lows, leaving shipowners and storage companies best placed to benefit from this tumultuous period.

Freight rates and storage costs are ballooning as the market faces the prospect of more oil just as demand destruction due to the spread of COVID-19 escalates.

“Floating storage turns into a welcome bridge to tie up tonnage and support rates until the current storm subsides,” BRS Shipbrokers Research said in a recent note.

Storage costs have almost doubled in less than week, sharply supported by a stronger contango market structure.

The VLCC Miltiadis Junior was placed on subjects on an 80-120 days time-charter for storage and delivery in the US Gulf at a rate of $60,000/day, according to sources.

This compares with levels of around $28,000-$34,000/day last week, S&P Global Platts estimated.

In a contango market, the forward price of oil is above the prompt price, inferring weak prompt demand and growing oversupply, encouraging storage.

Contango is normally considered a key indicator of a depressed oil market and oil traders have to hoard oil on land or on ships to cut risks.

North Sea opportunities

Slumping crude prices — ICE Brent is currently hovering just below $34/b — is usually a catalyst for charterers and traders alike to look to floating storage as an arbitrage opportunity, with interest in this strategy skyrocketing, according to market participants.

The North Sea paper market has experienced a steepening contango this week as prompt values come under pressure, encouraging sellers to look at storage options while demand both locally and in Asia remains crimped by the coronavirus and refinery maintenance.

Key North Sea grade Forties, for example, is at the moment being stored on four Aframax tankers just outside the UK’s Hound Point terminal, shipping sources said. These vessels loaded at the end of February.

Platts assessed the March 16-20 CFD at a $1.08/b discount to April 13-17 Thursday, this compared with March 5 when March 16-20 was assessed at a 73 cents/b premium to April 13-17, representing the switch from a backwardated to contango structure.

Rates in the ascendancy

Shipowners, however, are preferring to capitalize on long voyages in the current strong spot market, rather than locking their ships away in six-month storage charters.

Freight for the VLCC West Africa to Far east route on a 260,000 mt basis was assessed at Worldscale 140 Thursday, or in excess of $50/mt of crude transported, soaring 183% since last Friday.

Saudi Aramco has said it aims to supply 12.3 million b/d of crude to the market in April, an all-time record for the kingdom. This is almost 30% above what it produced in February and around 300,000 b/d above its maximum production capacity.

This has pushed VLCC rates to fresh highs. The 270,000 mt Persian Gulf to Japan route was assessed at $47.52/mt Thursday, surging 300% from last Monday’s levels of $11.94/mt. The outlook remains extremely bullish with shipowners pushing the market ever higher as they seek to capitalize on the rising market and lock in high profits for long voyages.

Platts (March 16, 2020)