Amidst the global economic standstill due to the pandemic, a tremendous glut in crude oil supply resulted, and consequently, oil prices plunged. This boded well for the oil tanker industry. But effective May 1, oil producing countries have begun to lower output to reduce the over supply of crude oil. As a result, the price of crude oil has doubled, although still quite low. You might think that floating storage no longer floats. Rethink that.

The number of floating storage tankers has been increasing daily, which will help the shipping sector recover. Globally, surplus oil –both commercial and strategic petroleum reserves– is now rapidly flowing into onshore storage facilities. With worldwide conventional oil storage that could hold 3.4 billion barrels expected to run out of space by end-May, and thereafter would need to flow into floating oil tanker storage, an increase in floating storage became the inevitable solution, Drewry Financial Research Services Ltd reports.

London-based Gibson Shipbrokers stated that by mid-April, oil held in floating storage tankers reached 160 million barrels. 70 laden very large crude carriers (VLCCs) remained stationary for at least 4 weeks before May 11, proving that “contango” was in play. Traders were buying relatively cheap oil, chartering a ship, storing the oil in the ship, and hedging themselves on paper. A contango trade takes place when a commodity’s future price is higher than the commodity’s spot price today.

Offshore floating storage is not a new phenomenon. They are vessels laden and stationary for at least four weeks. A storage flotilla between mid-2009 and early 2010, storing both crude and refined products, looked so impressive. The number of floating Panamax and VLCC storage peaked at 131 units with a high of 56 VLCCs. Then during 2015-16, there were 50 VLCCs used as crude floating storage due to contango, and Iranian sanctions.

There is an increase in the number of laden VLCCs being stationary but much less than a full 4-weeks. AIS data shows 20 VLCCs in early May, double early April levels. Tankers can have unexpected discharge delays due to quarantine measures and forced storage for an extended period most likely because of ullage delay, the amount of empty space in a cargo ship’s hull or in an oil terminal tank —think of the space at the top of a wine bottle that could have been filled. Yet, ullage delay is positive for charters as it pads on to voyage time.

Apart from forced storage is the prospect for contango. The major increase in time charters supports this view, when the contango widened significantly in March and April. “About 80 VLCC time charters were reported, compared to 13 in the same period last year. A 3-month spread in Brent futures peaked on 21 April at $9.75/bbl, sustaining a 3-month storage at $204,000/day on a VLCC before accounting for any profit margin for the trader,” Gibson Shipbrokers reports.

Oil industry players are primarily signing up 6-month charters. Traders want to hedge but are lacking the space to store the oil. Hence the need to rent large oil tankers. Floating storage contracts are not only made for VLCCs, which are tankers that can hold 2 million barrels of crude oil, but also Suezmaxes, which are tankers that can hold 1 million barrels of crude oil.

There is also high demand for floating storage for refined products. International Seaways CEO Lois Zabrocky predicts there will be new building of VLCCs and Suezmaxes for storage. He said all refineries worldwide and all oil producing countries are calibrating with demand. When refineries run too high, excess refined products go into storage.

Euronav conservatively estimates 14 million barrels/day will go into storage in May, and 2 million barrels/day in June. If Euronav’s estimates prove true, “You could see twice as many VLCCs and twice as many Suezmaxes being taken before the end of June, which would have a positive impact for the ships that are still trading because there’s still a lot of demand for transporting oil, and the spot market should reflect the diminishing supply of the world fleet,” said Euronav CEO Hugo De Stoop. Drewry conservatively estimates nearly 7 VLCCs/day will be required to store 20 million barrels/day of surplus oil, even after the oil production cut of 9.7 million barrels/day by OPEC+.
De Stoop explained that the drawdown of storage starts with the consumer of refined products. Upon drawdown of gasoline, diesel and jet fuel stored on land and at sea, refinery demand for crude inputs increases. And when more crude oil is needed, the first to be processed is land-based storage near refining facilities, before offshore-based storage is touched. When demand is high enough to unload crude oil from floating storage, there is either a quick drawdown or a slow drawdown.

More likely, a slow drawdown would happen since the last contango in 2015-16 took a year for storage tankers to return fully to the trading fleet. If all the stored oil flowed back to the market, oil price would be a negatively impacted. A contango curve would be created, as the price would be positively higher in the forward contract. More shipowners will play the game and store oil, De Stoop said. The rise in floating storage will lessen the vessels for active trade resulting in higher vessel day rates, Drewry reports.

Esben Poulsson, Chairman, International Chamber of Shipping, estimates that 1/3 of VLCCs, which are about 300,000 DWT tons, are being used for storage purposes. Aurian de La Noue of Wood Mackenzie says these VLCCs are floating idly where oil demand is expected to rise, e.g., U.S. west coast, China and East Asian coasts, and Singapore. When demand for crude inches up, these VLCCs are in the best coasts to offload. But once crude prices are back to normal, the contango play will no longer work. Tanker stocks will rise, making storage tankers rapidly unload and return to tanker shipping again.

Main References:

• Miller, Greg (7-May-2020). “Floating storage is far from dead in the water.” Freightwaves.com.
• Roussanoglou, N (11-May-2020).“Floating Tanker Flotilla to Remain in Play as Conditions Favor More Crude Storage.” Hellenic Shipping.
• Drewry Financial Research Services Ltd (11-May-2020). “Drewry: Decoding Stock Prices Volatility.” Hellenic Shipping.
• CGTN (6-June-2020). “Global Shipping Industry Continues to Face Disruptions due to Corona Virus.” Hellenic Shipping.