Floating On An Ocean of Crude

Jim Brown
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Actually that title should read an ocean of crude is afloat. The tactic of buying spot crude when it is cheap and storing it has had mixed success in recent months. Back in April there were more than 100 million barrels in floating storage because ships were cheap and so was crude.

Reuters reported the volume of crude stored in tankers globally has dipped to between 32 million and 42 million barrels according to estimates from brokers who handle the ship loadings. This is a monster decline from the more than 100 mb back n April. You may remember that crude prices fell as far as the mid $30 range back in March. With futures for December delivery in the $50 range quite a few large investors chartered tankers and pulled in for a fill up.

Storage on land around Cushing Oklahoma normally runs about $1 per barrel per month. Storage at sea for a 1 million barrel single hull tanker sank as low as $10,000 per day for a charter and probably less as a storage tank going nowhere. Tankers holding a position in an anchorage don't cost much to operate. Pushing a million barrels against tides and headwinds all over the world burns up tens of thousands of gallons of fuel and runs up the cost.

Frontline said back in January they idled 15 tankers in January but suddenly saw requests for 6-9 month charters go through the roof. Shipbroker Galbrath's Ltd said rates were equivalent to 90-cents per barrel per month to store oil on tankers. They said 35 supertankers of about 7% of the fleet had been chartered for storage. Iran chartered 15 ships to store oil back in May. Mike Reardon of freight exchange Imarex said a 2 MB supertanker was even cheaper with a 50-cent per month/barrel rate. Shipbroker C.R. Weber said ICAP Shipping showed 21 VLCC tankers were storing oil as of Nov 20th. That was up from 19 the prior week. Shipbroker SSY had 19 VLCCs and two smaller tankers. That was lower than the 26 under contract with them the prior month.

Not only oil was being stored. Back in June there were 41 million barrels of gasoline and jet fuel in storage off the coast of Europe. JP Morgan was chartering tankers to store gasoline off the coast of Malta back in June. In August Conoco and Shell (RDS) were leasing tankers to store oil. Conoco (COP) leased a 2 million barrel tanker to store oil offshore from Galveston.

The Reuters reports that floating oil has dropped to less than 40 million barrels is actually bullish for prices. That means there is less readily available oil for sale and the excess supply has slowly dwindled away. In September and October the contango discounts fell to between 30-40 cents per barrel and less than the cost of storage and that prompted many traders to liquidate their cargos.

Storage at Cushing Oklahoma, the delivery point for the U.S. crude contracts, holds about 35 million barrels. Through November 20th oil in storage had risen +11% over the prior three weeks to 28.32 mb. Cushing peaked at its limit in February forcing the price of near term futures contracts to their lows for the year.

Since oil consumption rises slightly in winter as heating oil demand competes with transportation fuels for refinery capacity the price of oil should rise slightly. However, contango increases in Q2 as large refineries shutdown for maintenance. That could stimulate another round of storage increases.

Jim Brown