Why Oil Prices Are About To Plunge Again: 31 Million Barrels In Floating Storage Are Coming On Shore

Tyler Durden's picture




 

One week ago, we wrote that as a result of the collapsing crude contango, oil tankers (such as the fully loaded Distya Akula which has been on anchor in the Suez Canal for one month unable to find a buyer for its cargo so it continues to wait) "will soon have to unload their cargo", in the process flooding the already oversupplied market with millions of barrels of crude oil, thus pushing the price of oil far lower. But how many millions of barrels, and how much lower will the price of oil go?

For the answer we go to Deutsche Bank's Michael Huseh, who has done the calculations to get the answer.

What he finds is that since the start of 2014, global floating storage inventory has ranged between 80 and 180 million barrels (Figure 1). According to estimates of the global VLCC fleet at the end of 2014, the potential storage capacity is implied to be 1169 million barrels. Adding Suezmax  vessels would add 528 million barrels of capacity.

After touching 186 million barrels in early March, inventories have begun to decline once more. Since the start of 2015, one can identify both periods when builds in floating storage have been associated with rising Brent prices, and also periods when draws in floating storage have been associated with falling Brent prices (Figure 2). Since the Arabian Gulf has represented much of the variability in floating storage inventory, one can also measure the incentives to add or withdraw from storage using Arabian Gulf tanker rates.

South East Asia would be another valid candidate to measure economics, as floating storage inventories in that region have moved in a very similar fashion (Figure 3).

 

As we discussed recently, as a result of a recent surge in hedging activity in the front-end of the strip, absent a dramatic collapse in spot prices, the contango is now so low as to make offshore storage no longer economical. Specifically, based on the all-in cost of operating tanker storage (dirty VLCC tanker day rates, financing, transit and transfer loss, insurance and bunkers, Figure 5), the current storage cost is too high relative to the steepness of the Brent forward curve. This means that prices do not justify inventory build, but rather gradual inventory drawdown as existing storage trades are unwound.

 

What is the current prevalent duration of booked offshore storage? A comparison of the historical profitability of storage trades of varying lengths indicates that even at the most extreme instances of contango in the last two years, the Brent forward curve is only steep enough over the first 2 to 6 months to justify the floating storage trade. Comparing the trade economics over a one-month horizon (Figure 4) and over a six-month horizon (Figure 6) shows the relative unattractiveness of the six-month trade. We use the second month Brent contract owing to discontinuities in the pricing of the rolling first month contract. Thus we would expect that floating storage trades begun in late January or early February would be unwound by July or August.

As DB calculated, comparing the current level of floating storage (157.3 million barrels) versus that in early February (126.6 million barrels), there may be an additional 31 million barrels of inventory to be drawn down between now and the next inventory trough over the next several months. Depending on the duration of drawdown (three months or six months) this could mean anywhere from 165-330 kb/d of incremental supply.

So how, according to DB, should one trade this imminent surge in incremental supply?

A tactical short position in Brent may benefit from the contango roll yield which over the first six months of the curve is an annualized 14%. Over the first year of the Brent curve, the roll yield is 11.9% p.a., and to provide an extreme comparison, the roll yield over the first six years of the curve is only 5.3% p.a. In other words, in a flat oil price scenario the contango roll yield for a short position would still provide positive returns if the curve structure remains static. In an upside oil-price scenario, the six-month forward contract should rise slower than the spot price.

Long WTI-Brent may be a viable alternative: because positioning in Brent is more clearly extended than NYMEX positioning in WTI, and also because US refineries returning from maintenance may add an incremental 717 kb/d of refinery crude demand between now and June, we believe WTI may be better supported than Brent. Brent net long non commercial positions rose to 164 thousand contracts in the week ending 15March, which is just below the 2015 high of 166 thousand contracts, although still some way below the 2014 high of 195 thousand contracts.

In WTI positioning on NYMEX however, net long non commercial positions stand at 331 thousand contracts, only 69% of the record high of 480 thousand contracts in June 2014. Therefore an alternative to selling Brent outright may be a long position on the WTI-Brent spread.

* * *

Of course, if DB's calculations are correct, and if over the next three months 20% of the total 157 million barrels in offshore inventory are set to come onshore, not only will underlying prices slide, but higher beta assets, such as energy equities but mostly junk bonds due to their record high correlation with energy prices as we showed before...

... the best trade may be to either sell cash bonds or, if one can find them in this illiquid market in which even the ECB is now actively involved in bond purchases, simply buy junk bond CDS.

Because between the surge in recent hedging, the collapsing contango, the failure of supply to decline, the failure of demand to increase, there is only one thing the price of crude oil can do: tumble, no matter how many flashing red "OPEC meeting" headlines Bloomberg blasts at idiot headline-scanning algos.

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Wed, 03/23/2016 - 22:07 | 7354860 DOT
DOT's picture

Going lower? I'll buy that.

Wed, 03/23/2016 - 22:21 | 7354912 El Oregonian
El Oregonian's picture

I guess all these "False Flags" just ain't gett'in 'er done for TPTB.

Thu, 03/24/2016 - 03:08 | 7355487 PT
PT's picture

Dammit!  Dammit!  Dammit!  I'd love to help with that excess oil "problem", but I still can't afford that 7 litre V8.  Hell, I'd even love to just store a few million barrels in my back yard.  If I had a back yard.  How much to build my own little refinery?  Damn!  Damn!  Damn!  Lack of money really shits me...

Thu, 03/24/2016 - 03:18 | 7355493 OldPhart
OldPhart's picture

Anyone find it weird that we're building storage facilities out the wahoo, but not a single refinery?

I wonder why.

Thu, 03/24/2016 - 07:09 | 7355713 Singelguy
Singelguy's picture

Nobody wants a refinery in their backyard just as no one wants a nuclear reactor in their backyard.

Thu, 03/24/2016 - 00:17 | 7355213 Kirk2NCC1701
Kirk2NCC1701's picture

Rx = let "ISIS blow up a dozen or so.

You know, Keynesian "Broken Tankers" effect? 

And don't overlook the opportunity to remove more Freedoms?

Thu, 03/24/2016 - 03:41 | 7355514 Yukon Cornholius
Yukon Cornholius's picture

Nah, Charlie sheen and the navy seals would rescue the tankers.

Ooooooooh! Navy Seals!

Thu, 03/24/2016 - 03:36 | 7355503 JuliaS
JuliaS's picture

According to govt stats, US consumed over 9 million barrels of gasoline per day in 2015. That's gasoline, mind you, not crude!

Each barrel of sweet crude produces roughly 78% distilled fuel, meaning the 31-mil oil supply equates to 24-mil barrels of gas and diesel. That's less than 3 day worth. Oh the horror!

Wed, 03/23/2016 - 22:16 | 7354868 lunaticfringe
lunaticfringe's picture

Prices will not go down. People continue to write and comment as though markets respond to some sort of fundamental supply and demand ecomomic theory. Nothing could be further from the truth.

Big oil and the banking cartel will manipulate prices to 50-60 by summer and I don't give a fuck if they have to store excess oil in red solo cups over the entire western range. They'll start a war to scare up prices if they have to. Watch and learn.

Wed, 03/23/2016 - 22:17 | 7354902 Bill of Rights
Bill of Rights's picture

Yup long to $60

Wed, 03/23/2016 - 22:36 | 7354942 NoWayJose
NoWayJose's picture

It's as reliable as spotting the first robin - oil prices go up in spring. 31 million barrels is a 'fundamental' - by now we know that fundamentals are irrelevant. Tis the season for refinery fires, barge collisions, rebels attacking oil infrastructure, refinery shutdowns and conversions, Middle East saber rattling, etc. Supposedly Al-Qaeda just launched some rockets at a BP plant in Algeria.

Wed, 03/23/2016 - 23:30 | 7355116 buzzy_the_pirate_dog
buzzy_the_pirate_dog's picture

Yep I bought calls out to Aug.  This cheap oil shit has gone long enough.  Way too much pain for too many things that don't like pain.  Short term, sure back to 29, long term, hell no.

Wed, 03/23/2016 - 22:38 | 7354953 runningman18
runningman18's picture

Prices have been going down for the past year, so yeah, they are likely to continue the trend.  A year ago people were claiming oil would never drop again and look at where it is now.  Watch and learn.

Wed, 03/23/2016 - 22:11 | 7354876 DownWithYogaPants
DownWithYogaPants's picture

burp

Wed, 03/23/2016 - 22:21 | 7354909 Kirk2NCC1701
Kirk2NCC1701's picture

And yet gas prices are > $2/gal in the Pacific NW.

I wanna see them go in the same direction as those Yoga Pants!

Wed, 03/23/2016 - 22:40 | 7354957 NoWayJose
NoWayJose's picture

Sitting at $1.99 - up 50 cents in a little over a month. Gas pump prices have been very accurate when playing the dips versus rips. Wall Street pushes up oil but pump prices don't change - means 'sell the rally'. Wall Street hammers oil prices but pump prices do not go down - means 'buy the dip'!

Wed, 03/23/2016 - 22:55 | 7355015 cornflakesdisease
cornflakesdisease's picture

$1.79 in Houston

Thu, 03/24/2016 - 00:35 | 7355251 Ward no. 6
Ward no. 6's picture

speaking of yoga pants we had a discussion of them at work today

so damn disgusting to have to see 200-300 lb women wearing them

seriously don't they realize how disgusting they look in them?

wtf

i mean they are ok on a thin person but i have to put up with in your face ppl wearing that shit at work and it doesn't look good when it emphasizes evey fucking glob of fat

i wish that shit would go out of style

Thu, 03/24/2016 - 07:19 | 7355727 RaceToTheBottom
RaceToTheBottom's picture

Parachute pants.

Wed, 03/23/2016 - 22:14 | 7354889 P4K
P4K's picture

Right it's only bearish when it comes onshore. Now I get it. So easy.

Wed, 03/23/2016 - 22:17 | 7354900 fowlerja
fowlerja's picture

Oil prices going down...maybe? World consumes 100 million barrels per day...not sure this is going to be a game changer...

Thu, 03/24/2016 - 00:26 | 7355234 PTR
PTR's picture

Exactly.

Thu, 03/24/2016 - 01:37 | 7355377 The Ingenious G...
The Ingenious Gentleman's picture

Right, this 31m barrels in the headline is less than 8 hrs supply. Not exactly a horror story. 

Wed, 03/23/2016 - 22:17 | 7354901 Jagov
Jagov's picture

Sounds like 31 million barrels of oil being dumped in the ocean to me. 

And right when Finding Dory is about to come out, how sad.

Wed, 03/23/2016 - 22:24 | 7354918 db51
db51's picture

Now that was Funny.  lmao

Wed, 03/23/2016 - 22:27 | 7354923 hardmedicine
hardmedicine's picture

bUT i THOUGHT THERE WAS PEAK OIL??  I thought that oil prices were going up always.  I don't understand?

 

Wed, 03/23/2016 - 22:35 | 7354939 Hohum
Hohum's picture

Yippee!  World demand satisfied for eight hours!

Wed, 03/23/2016 - 22:45 | 7354978 lester1
lester1's picture

Rumor has it the NY Fed has been buying oil futures contracts to artificially prop up oil prices.

 

Then they have the oil dumped back into the ocean to they don't have to pay to store it. 

 

Audit the Fed !!

Wed, 03/23/2016 - 22:46 | 7354986 directaction
directaction's picture

Big deal. The world sets fire to 20 million bbls/d.

This is 37 hours worth. Mere chump change. 

Wed, 03/23/2016 - 22:49 | 7354995 Herdee
Herdee's picture

I've heard the bullshit being preached by the Wahhabi element that Iran can't put out.They're dead wrong and it's happening as we speak.The spike up was manipulated in order to give oil companies the chance once again to hedge production for the next price drop.She'll be a good summer driving season for sure.

Wed, 03/23/2016 - 22:51 | 7355004 Dragon HAwk
Dragon HAwk's picture

you mean paper oil doesn't work when you actually have to put it in a tank somewhere if you don't burn it.

Wed, 03/23/2016 - 23:20 | 7355093 NoBillsOfCredit
NoBillsOfCredit's picture

during the phony 1970s oil crisis they said that we would be completely out of oil by now! what happened?

Thu, 03/24/2016 - 00:09 | 7355204 Fullthrottle
Fullthrottle's picture

Contrary to many posters thinking it either wont go down or if it does it wont last your wrong. Things are unwinding faster than you think. Automotive sales are tanking and so are home sales. Aside from all this terrorist activity thats going on and will continue in Europe and it WILL happen here. You can damn sure go long on that considering we have no borders either. 

Thu, 03/24/2016 - 01:09 | 7355319 Manipuflation
Manipuflation's picture

So who is the largest producer of crude oil in the world right now?  Are the economies of the world based on oil or not?  This might not be what you want to hear but it is the United States who leads the world in crude oil extraction.  We Mericans have become an oil exporting nation via private enterprise.            

Thu, 03/24/2016 - 03:57 | 7355523 yt75
yt75's picture

"We Mericans have become an oil exporting nation via private enterprise. "

lol, No you are not, and by FAR.

 

But who cares about data and reality ?

http://www.artberman.com/the-crude-oil-export-ban-what-me-worry-about-pe...

Thu, 03/24/2016 - 06:18 | 7355667 Quebecguy
Quebecguy's picture

OK Z-H. Please repost. OK Z-H. Please repost. OK Z-H. Please repost. OK Z-H. Please repost. OK Z-H. Please repost.  

 

http://usuncut.com/politics/5-examples-voter-suppression-arizona-primary/

 

https://petitions.whitehouse.gov/petition/investigate-voter-fraud-and-vo...

Thu, 03/24/2016 - 09:10 | 7356068 roadhazard
roadhazard's picture

I'm shocked

Thu, 03/24/2016 - 09:32 | 7356164 Jacksons Ghost
Jacksons Ghost's picture

BS, Deflation is aCentral Bankers worst nightmare. They will prop Oil futures. All markets are rigged by CB's now. Go Opposite of what they tell you. Go fucking LONG!

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