Tankship Market & Return of Contango: Analysis

By George Backwell
Monday, July 21, 2014
Crude carrier: File picture CCL

This week, the Brent price curve moved into contango on what was reported to be short-term physical oversupply. In their latest 'Tanker Opinion', Poten & Partners consider whether this is likely to be a long-lasting change

(“Contango” is a term used to refer to a commodity price structure whereby the spot price is lower than the future price).

The swirl of political events and policy changes over the past few weeks has churned out mixed results for the crude oil markets. At this point it is difficult to characterize the state of the market as anything but flux. The persistence of geopolitical unrest – Ukraine v. Russia, Iraq v. Iraq, and Israel v. Gaza – has supported overall price levels above near-term historical averages. But, crude oil price benchmarks that typically move in tandem, diverged this week.

 Perhaps eclipsing the shaky political climate, infrastructure developments and policy changes have, at least for the short-term, apparently decoupled the US crude oil benchmark, West Texas Intermediate (WTI), and its European counterpart, Brent, in potentially significant ways. While it is too soon to say whether this will be sustained, this development could raise some interesting prospects for the tanker market.

This week, the Brent price curve moved into contango on what was reported to be short-term physical oversupply. “Contango” is a term used to refer to a commodity price structure whereby the spot price is lower than the future price. Typically, oil market price structures are in what is the opposite of contango - “backwardation” – where the spot price is higher than the future price: think; a bird in the hand is worth two in the bush.

The driver of a transition from backwardation to contango is the sense that the market feels well supplied today (spot), but that it could be undersupplied in the future (forward); hence, the higher relative price. Often, this results from the realization that the market is more adequately supplied than originally thought.

At the time of writing, the Brent contango is relatively small. The premium for both the one-month and two-month forward contract is $1.35 per barrel.

It is interesting to note the pronounced backwardation in early June 2014 and the contango of December 2008. At that time, there was an $8.03 per barrel premium for a 6-month forward contract. At that time, crude oil was also $40.81 per barrel! The steep contango resulted from the near-term price collapse in oil, but the general recognition that prices would recover over time. To the tanker market, these price differentials of $5.00-$8.00 per barrel justified the economics of hiring vessels for floating storage -- lots of them. At one point, between 40-50 VLCCs were reported as floating storage.

When evaluating the use of tankers as floating storage, here are the costs to consider: daily hire of the vessel, carrying cost of holding the oil cargo, insurance, and operating expense or fuel for the ship (depending on the charter arrangement.) It seems unlikely that the nascent, if budding, contango of today, at a mere $1.00 per barrel, could warrant the expense and effort associated with hiring a vessel expressly for floating storage.

Instead, what is likely to happen is that oil companies with barrels on the water might exercise floating storage clauses (which are common in many charter parties) or simply sit the vessel and incur demurrage. If more ships are in storage, key markets, like the Arabian Gulf, could experience shortened tonnage availability in the coming months.

At present, demurrage for a VLCC is assessed to be $40,000 per day. At that rate, an oil company would just about break-even from a freight perspective for a two-month storage charter. However, remember, that kind of math does not consider the other associated carrying costs. Assuming a 10% cost of capital, the monthly carrying costs are approximately $0.89 per barrel on the basis of $106/bbl crude oil – more than double that of 2008. These assumptions suggest that the contango would likely need to deepen to the tune of $3.00+ per barrel in order to incite material storage charter activity.

Poten concludes:
This week’s developments intimate that the WTI benchmark could be moving more toward global parity over time, due to new pipeline infrastructure and the heightened discussions on crude oil exports.

The longer-term knock-on result could be renewed employment for Suezmaxes and Aframaxes shuttling crude oil around the Atlantic Basin.

Source: Poten & Partners

Maritime Reporter November 2014 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

Madsen to Chair Norway’s Research Council Executive Board

Henrik O. Madsen appointed chairman of the executive board of the Research Council of Norway   DNV GL president and CEO Henrik O. Madsen was appointed as chairman

Port of Houston Expecting Record Year

The Port of Houston Authority is expecting 2014 to close as a banner year for the port, with 34 million tons of cargo handled through November, Executive Director

Hapag-Lloyd Completes CSAV Merger Capital Increase

Hapag-Lloyd completed the planned capital increase of EUR 370 million (approximately $452.5 million) as part of the business combination with the Chilean shipping

Tanker Trends

Larger Tankers May Offer Better Return Chances

Investors looking for returns in the tanker markets can invest their capital in a variety of ways. Should an owner invest in a VLCC or an Aframax? How about an

Benghazi Port Still Closed, Imports Rerouted

The commercial port in Libya's second city, Benghazi, remains closed due to fighting between pro-government and Islamist forces, forcing wheat imports to make a detour via Tobruk harbour,

EGAS Tenders for as many as 48 LNG Cargoes

Egypt's state-owned gas company EGAS has tendered to buy at least 48 cargoes of liquefied natural gas (LNG) for delivery in 2015/16, three traders said. A senior

Finance

Larger Tankers May Offer Better Return Chances

Investors looking for returns in the tanker markets can invest their capital in a variety of ways. Should an owner invest in a VLCC or an Aframax? How about an

US Plans to Shut Royalty Loophole on Coal Exports

U.S. coal companies will no longer be able to settle royalties at low domestic prices when they make lucrative sales to Asia according to reforms proposed by the Interior Department on Friday.

Hapag-Lloyd Completes CSAV Merger Capital Increase

Hapag-Lloyd completed the planned capital increase of EUR 370 million (approximately $452.5 million) as part of the business combination with the Chilean shipping

Fuels & Lubes

Liquefaction Terminals to Dominate LNG Capital Expenditure

Capital expenditure (Capex) on global LNG facilities is expected to total $259 billion (bn) over the period 2015-2019, with investments expected to be 88% larger

Wärtsilä to Begin Building LNG Terminal in January

Wärtsilä has been given full notice to proceed (NTP) from Manga LNG Oy for the supply of a liquefied natural gas (LNG) import terminal in Tornio, Northern Finland.

Italian Shipbuilder Pleads Guilty to Environmental Crimes

An Italian shipping firm based in Genoa, Italy, pleaded guilty to violating the Act to Prevent Pollution from Ships by falsifying required ships’ documents to hide

Logistics

Port Workers in Argentine Grain Hub End Strike

Port workers in part of the Argentine grains hub of Rosario lifted a work stoppage on Friday, only a day after they went on strike over demands for higher year-end bonuses, a union official said.

Port of Houston Expecting Record Year

The Port of Houston Authority is expecting 2014 to close as a banner year for the port, with 34 million tons of cargo handled through November, Executive Director

Costa Rica Approves APM Terminals Project

Port operator APM Terminals, a unit of Denmark's A.P. Moller-Maersk, said on Friday Costa Rica's environment agency had approved the construction of its Moin Container Terminal project.

 
 
Maritime Security Maritime Standards Naval Architecture Offshore Oil Pod Propulsion Port Authority Ship Electronics Ship Repair Shipbuilding / Vessel Construction Sonar
rss | archive | history | articles | privacy | terms and conditions | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1615 sec (6 req/sec)