Oil traders may look to the sea for profit amid prices collapse
Bloomberg reported that while traders are already cashing in on the surplus by housing oil in onshore tanks across the globe, including on the tiny Caribbean island of St. Lucia, expanding the storage to tankers at sea may near a point where it becomes profitable, according to Citigroup Inc, Goldman Sachs Group Inc. and IHS Maritime & Trade. A structure called contango, when the price of a commodity to be delivered in the future is higher than if it was sold today, has been moving in the right direction.
Vessels laden with oil, parked offshore from Singapore to the Gulf of Mexico, became a feature after the global financial crisis as the widening contango allowed traders with access to storage to lock in a profit. As the spread expanded again amid a global supply glut, tanker owner Frontline Ltd. fielded inquiries last month about options to house crude at sea.
Mr Frode Moerkedal, an analyst at Clarksons Platou Securities, said that “Even though the contango is not wide enough yet, it could become so if OPEC continues to overproduce relative to demand.”
According to Mr Andrew Scorer, an analyst at IHS Maritime & Trade, with the Organization of Petroleum Exporting Countries already pumping above its 30-million-barrel-a-day quota for more than a year, Iran’s plans to boost output after sanctions are lifted threaten to worsen the oversupply a market condition that typically deepens a contango. That could see more oil stored at sea during the fourth quarter.
The profit opportunity requires a little further steepening of the Brent forward curve at current freight rates, Goldman said in a September 11th report. The widening spread is bringing the potential of floating storage back into play, Citigroup said this month.
The spread would need to widen to $4 a barrel during a three-month period for storage to be viable, according to estimates by E.A. Gibson Shipbrokers Ltd. on Sept. 23. Brent crude for November settlement was at a $2.08 discount to the February contract on the London-based ICE Futures Europe exchange at 11:52 a.m. in Hong Kong.
Mr Nikhil Jain, an analyst at Drewry Shipping in New Delhi, said that “Once Iranian crude is out in the market, then it might start affecting spot prices for crude oil, which could eventually open up the contango again. The spread during a 3 month period needs to reach about USD 3.30 a barrel before floating storage would work.”
As Frontline takes calls on storage options, Mr Paddy Rodgers, the CEO of Euronav, one of the world’s largest owners of oil supertankers, sees crude being housed at sea over the next four to five months. The increase in floating storage may also tighten the shipping market and boost freight rates.
Source : Bloomberg