Hoard now, sell later the mantra as oil storage, freight rates surge

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)