For much of 2015, talk of floating storage was dominated by speculation that the contango in crude futures might support crude floating storage, says Gibson Tanker Report.
However, at the same time, much of the oil surplus was being absorbed by refiners chasing some of the best margins seen since the financial crisis, pushing much downstream into product stocks.
It was therefore little surprise to see product stocks swell and floating products storage emerging in the latter stages of 2015, despite product contango structures not necessarily being supportive of a play.
Initially, clean floating storage was centered on Europe and the Mediterranean, as the US, Russia and the new Middle East refiners flooded Europe with
middle distillates, whilst at the same time European refiners maximized runs.
These factors pushed land based distillate stocks in ARA to record levels, forcing the need for floating storage. In recent weeks the diesel glut may have eased off marginally in the region, with the number of product tankers engaged in storage easing as higher inland demand and refinery maintenance draw down supplies.
However, with seasonal maintenance starting to subside, and heavy inbound diesel flows from all directions, including a VLCC from Asia, this respite is likely to be short lived.
Outside of Europe, a noticeable increase in product storage activity has picked up in recent weeks, with 4-5 LR2s sitting laden off Singapore as light distillate stocks are just below the record level of 15 million barrels.
However, with peak Asian gasoline demand season approaching, such stocks may soon be drawn upon - if demand seasonality follows typical trends. Nevertheless, with increased interregional flows and ample supplies in the West waiting for the right economics to ship to the Far East
, the region is set to remain well supplied for much of the year.
However, longer term, pressure on global refining margins will prompt capacity reductions. Many refining analysts expect margins to fall to lower levels over the course of the year, bringing back expectations that the familiar story of capacity reductions in ageing refining centers (Europe, Japan, Australia
) will once again begin to play out, albeit a few years later than originally anticipated.
However, to force this story, persistently weak margins will need to emerge, prompting run cuts and shuttered capacity by the weakest links. However, with gasoline cracks expected to outperform diesel, gasoline orientated refiners may be in a position to hold on longer than what might have been envisageda few years ago.
Yet until this story unfolds, floating products storage could remain a feature of the market, even if the absolute volumes are limited. In the short term, whether floating storage is positive or negative for the tanker market is debatable.
On one hand it creates inefficiencies and delays, which constricts the supply of tonnage, supporting freight. However, on the other, it can limit trading opportunities, which has been evident in recent months. However, one or more catalysts could soon see this change.