Floating Storage Flattens Fortunes of $50 Crude

Maritime Activity Reports, Inc.

May 29, 2016

Photo: Alibra Shipping Ltd. Research

Photo: Alibra Shipping Ltd. Research

 The prices of WTI and Brent crude briefly rose above $50/bbl during intraday trading on Thursday, the highest level seen since the end of July 2015, giving traders a brief moment of optimism, says a report from Alibra Shipping Research.

But since then, prices have trended downwards. WTI currently hovers around the $48.92/bbl mark on NYMEX. Similarly, Brent is trading at around $48.91/bbl on ICE.
Analysts expect a further correction in crude prices because supply remains so abundant. Iran’s oil exports are expected to rise a further 200,000 bbl to reach 2.2m bpd by the middle of this summer.
Last Friday, rig counts in the US did not decline for the first time in 17 weeks, possibly indicating that America intends to ramp up oil production again. Meanwhile, disruptions to supply such as wildfires in Canada and unrest in Nigeria appear to be resolving themselves.
Global oil stockpiles, including floating storage, have increased for the past 10 consecutive quarters – and there’s a lot of oil in floating storage. A senior derivatives trader at Global Risk Management told the WSJ this week that if oil prices hit $51 or $52/bpd they could fall again by $6-$10 because of the volumes stored at sea.
It is estimated that almost 9% of the global VLCC fleet is currently booked for floating storage, which is a 40% increase in tankers by number since December. Reuters last week reported that at least 40 laden VLCCs anchored off Singapore as floating storage, storing estimated volumes of up to 47.7m bbl, thought to be the highest level in at least five years.
Rather than the prospect of arbitrage opportunities on the horizon, traders have been enticed to store oil at sea by the cost efficiencies created by cheap oil and falling VLCC charter rates during the first quarter. 
Morgan Stanley estimates the current one-month arbitrage on Brent in floating storage arb is -$0.48/bbl, while the 12-month arbitrage is -$6.11/bbl, implying there is no profit incentive to store oil on ships.
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