Back in April, as oil prices continued to plunge and the price of a gallon of gas dropped to below $2.00 in the United States, the global oil market was reeling from the effects of the COVID-19 pandemic.
During this time is when we first heard of supertankers being used as temporary floating storage facilities. “There’s oil all over the oceans right now. That’s where they are storing oil; we have never seen anything like that,” President Donald Trump said from the podium of the White House. “Every ship is now loaded to the gills.”
Trump was referring to traders using the free-fall in oil prices to store crude oil in the world’s fleet of supertankers as temporary floating storage facilities. It seemed to be a very lucrative trade-off – holding the oil offshore until better times come around again.
But, as the pandemic has dragged on and economies have tried to get back to normal, only to have another surge in the coronavirus put everything on hold again, Brent crude oil futures are languishing around $40 a barrel after posting their biggest weekly decline since June.
The situation leaves many on Wall Street to wonder why we are having a global inventory build-up despite major oil producers including Saudi Arabia and Russia sharply cutting back output and refineries slowing operations in recent months in response to an unprecedented drop in consumption.
“The market is soft and bearish and floating storage is returning again,” a market source said, reports Reuters. And the spread for Brent crude quick delivery and six-months in the future has been declining steadily toward $3 near lows last seen in late May.
“It is increasingly clear that market fundamentals are not improving as quickly as expected, particularly on the demand side,” Morgan Stanley analyst Martijn Rats said in a note.
According to RigZone, global Brent crude benchmark is currently trading quite deeply in a bearish pattern known as contango. Contango is a situation where the futures price of a commodity is higher than the spot price. In other words, the most immediate prices are far below those for contracts for supply in later months.
The discount has gotten so big that it appears to cover the nominal cost of hiring 1,200-feet long supertankers. In other words: traders can buy cargoes now, stash them on ships, and sell them later at a profit.
And this idea looks great on paper. However, this is due to the fact that charters for supertankers have crashed of late. A number of charter officials say that owners are still reluctant to accept multi-month charters at current levels because that locks in low revenue and it’s not ideal to keep the vessels in a single location for long periods of time.
However, the numbers show that this option appears to work, according to E.A. Gibson Shipbrokers Ltd. and exchange data compiled by Bloomberg earlier this week.
Bottom line? In general, the next few months are looking grim. Short of halting production for a short time, producers are having to contend with signs of an erosion in demand from China, whose record crude purchases in the summer months as it emerged from economic lockdown to scoop up cheap oil, mitigated demand damage globally, according to Yahoo Finance.
One top Chinese buyer said the outlook appeared grim. “There are fewer refinery runs in China, teapots (independent refiners) have used up a lot of their import quotas, inventories are still pretty high and crude at current levels are not great for margins.”
