Something Stunning Is Taking Place Off The Coast Of Singapore

Tyler Durden's picture

   "I've been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,"

   - Senior European oil trader a day after arriving in the city-state.

 

Back in November, when the world-record crude inventory glut was still in its early innings, we showed what we then thought was a disturbing image of dozens of oil tankers on anchor near the US oil hub of Galveston, TX, unwilling to unload their cargo at what the owners of the oil thought was too low prices.

 

* * *

Little did we know that just a few months later this seemingly unprecedented sight of clustered VLCCs would be a daily occurrence as oil producers, concerned by Cushing hitting its operating capacity, would take advantage of oil curve contango to store their oil offshore indefinitely.

However, while the "parking lot" off Galveston has since normalized, something shocking has emerged and continued to grow half way around the world, just off the coat of Singapore. This.

 

The red dots show ships either at anchor or barely moving, either oil tankers or cargo, which have made the Straits of Malacca, one of the world's most important shipping lanes which carries about a quarter of all seaborne oil primarily from the Persian Gulf headed to China, into a "bumper to bumper" parking lots of ships with tens of millions of barrels in combustible cargo.

it is also the topic of the latest Reuters expose on the historic physical crude oil glut which continues to build behind the scenes, and which so far has proven totally immune to dissipation as a result of the sharp increase in oil prices over the past three months.

Indeed, as Reuters notes, prices for oil futures have jumped by almost a quarter since April, lifted by severe supply disruptions caused by triggers such as Canadian wildfires, acts of sabotage in Nigeria, and civil war in Libya. And yet flying into Singapore, the oil trading hub for the world's biggest consumer region, Asia, reveals another picture: that a global glut that pulled down prices by over 70 percent between 2014 and early 2016 is nowhere near over, and that financial traders betting on higher crude oil futures may be in for a surprise from the physical market.

"I've been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers," said a senior European oil trader a day after arriving in the city-state.

As Asia's main physical oil trading hub, the number of parked tankers sitting off Singapore's coast or in nearby Malaysian waters is seen by many as a gauge of the industry's health.  Judging by this, oil markets are still sickly: a fleet of 40 supertankers is currently anchored in the region's coastal waters for use as floating storage facilities.

The glut is not only constant but is rising with every passing week: the tankers are filled with 47.7 million barrels of oil, mostly crude, up 10 percent from the previous week, according to newly collected freight data in Thomson Reuters Eikon.

What is curious is that the glut is persisting despite seemingly relentless demand by China. Earlier today Bloomberg calculated that 74 VLCCs are bound for China, the highest in 3 weeks, and up from 69 a week earlier. Still the inert glut off Singapore is enough oil to satisfy five working days of Chinese demand, suggesting recent supply disruptions - which have mostly occurred in the Americas, Africa and Europe - have done little to tighten supply in Asia as Middle East producers keep output near record volumes in a bid to win market share.

"The volumes of oil stored at sea in South East Asia - predominantly Singapore and Malaysia - appear to have increased significantly," said Erik Broekhuizen, Global Manager of tanker research and consultancy at New York-based shipping brokerage Poten & Partners. "The current volumes are the highest for at least the last five years."

What is taking place in the oil market appears to be merely the latest disconnect between the paper and physical markets, something quite familiar to precious metals traders in recent years. As Reuters notes, many participants in the physical market dispute recent notes from financial players like Goldman Sachs that forecast a further rise in crude futures. "There has been quite a bit of bullishness from hedge funds in recent months, betting on higher oil prices, and even the analysts at Goldman Sachs have recently turned more bullish on oil prices," said Ralph Leszczynski, head of research at ship broker Banchero Costa.

"Prices are unlikely to rise too much as the specter of glut is still there," he said. However, Leszczynski may be discounting just how powerful algo-driven momentum can be if, or especially when, it is completely disconnected from fundamentals.

* * *

While the sight of tankers at anchor is nothing new, this time something has changed.

Unlike before, when the contango of the oil curve made storing oil offshore profitable, this is no longer the case as contago-funded offshore profits have all but disappeared.

As a reminder, storing oil on ships can be profitable when prices for future delivery of crude are higher than in spot market, a term structure known as contango, as long as future prices are high enough to offset tanker charter costs. However, with the one-year contango for Brent futures collapsing from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive, suddenly parking oil offshore leads to storage losses. The same goes for WTI. 

At a charter cost of more than $40,000 a day for a Very Large Crude Carrier (VLCC) that can store 2 million barrels, the contango is nowhere near steep enough to make it profitable to store oil on tankers for sale at a later date.

 

This has led to a dramatic development in the oil market: debt-funded storage. Reuters writes that the need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates.

"We are receiving unusually high amounts of queries to finance storage charters," said a senior oil trade financier with a major bank in Asia. "These queries come from traders fully aware that they will not make a profit from storing the oil. This isn't a trade play, it's the oil market looking for places to store unsold fuel," he added.

So why are the traders doing this?

Simple: they hope that oil prices will rise fast and soon enough where the capital appreciation in crude will more than make up for the incurrence of new debt which will be repaid with proceeds from "selling higher." The risk, of course, is that oil does not rise and should prices tumble, traders will not only have a capital loss on their hands, but be forced to deal with the excess leverage they had hoped would promptly disappear.

To be sure, while we have warned in the past about the danger of offshore storage becoming unprofitable and being brought back onto the land market, in the process launching a liquidation dumping scramble, it has never been this bad. A trade financier at a European bank said there had been a "spike in interest from oil traders to finance their storage needs" since the start of the year as onshore facilities were almost full.

Still, with record amounts of oil stored offshore and with the profit on such storage now shifting into a loss, many are scratching their heads how much longer this imbalanced, and bank funded, situation can persist.

"Floating storage is unattractive economically, given the current term structure in crude futures," BMI Research said this week. Despite this, BMI said that "the volume of crude in floating storage has risen sharply in recent months," adding that the phenomenon was global, with floating storage up 19.5 percent between the first quarters of 2015 and 2016.

"There is clearly still far too much physical crude going around for the glut to be over," said the European oil trader after flying in to Singapore.

The trader's conclusion: "And the paper market seems blissfully unaware of it."

He is right... for now. Because all that will take for even the algos to give up their relentless upward momentum, is for some of these tens of millions of barrels to finally come onshore, which now that contango is no longer profitable, is just a matter of time.

In the meantime, just keep track of the unprecedented parking lot of ships off the coast of Singapore: the larger it gets, the more violent the price drop will be once banks say "no more" to funding money losing charters.

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Brazen Heist's picture

Its become a crude joke

nibiru's picture

The Baltic Dry is a low key pun then

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) nibiru May 20, 2016 11:19 AM

One day we get an article about record low prices for Baltic Dry and then the next one that all the tanker ships are being booked to store oil and sit idle.  The two don't match up.  Either there is no demand for ships or there is.  I would like to see those picture charts over time as well, showing a lot of ships near a port doesn't necessarily mean that they are all just sitting there forever.  If you went back a few years and looked at it and saw a similar picture then that would just mean that's how those maps look.  If you looked back a few years ago and over time there were only like 2 ships in the ocean at a time then we could say something has changed.

MillionDollarBonus_'s picture

This demonstrates the complete lunacy of peak oilers and their doomsday scenarios. I can only pity those humble fools that were suckered into buying oil and other commodities due to this fear mongering. As you can see, there is literally tons of oil and no risk of a supply shortage. I personally hope that this price shock puts these disgusting fracking companies out of business once and for all, so that we can focus on green energies such as wind and biofuels  that are far more sustainable and friendly to the environment. I believe that with a concerted effort by governments globally, we could easily replace all fossil fuels with green energies by 2025. It's time for us to band together and put a stop to climate change once and for all. We can do it if we put our minds to it - this is the time to commit to change and make a lasting difference that our children will thank us for in decades to come. So let's put our money where our mouths are, put our heads down and get to work to eliminate fossil fuels by 2025!

Bumpo's picture

Global Warming must have destroyed Peak Oil

Automatic Choke's picture

Did you catch the key sentence?   All these zillions of ships, and it represents 5 days of China demand.

Oil is a flowing commodity, not a static one.   The incredibly huge volumes of oil needed to satisfy world demand completely swamp all available storage.  World storage is small - I have seen various quotes for this, generally in the range of 40-70 days of use.

Anytime we have production even slightly in excess of demand, we have a glut.   The reverse is also true.  Storage cannot possibly do more than slightly damp the fluctuations.  Demand is relatively inelastic - at least over timescales less than a few years, so consumption doesn't respond much to price - making the price response to excess or shortage more extreme.

We're in glut now - world recession has contributed more than excess production coming on line, but both contribute.  Behind that is demographics:   population increase and third worlders becoming first worlders.  Meanwhile, old supply sources continue to slow output (no, they won't stop suddenly as some peak-oil proponents say, but the flow drops and extraction costs climb..... and new "elephant" size reserves just aren't there to find anymore to replace the old ones.)

The only question is:   when will the demographic pressures catch up to the delicate production/demand balance, and how fast will prices rise at that point?

 

BuddyEffed's picture

The tribe would rather see full stockpiles than full employment. That trade off explains many things.

That approach masks peak resources and resource constraints, especially if you can get unemployment statistics manipulated in your favor.

Bokkenrijder's picture

More of the usual ZH scaremongering in order to influence the gullible Joe Sixpack who has never left the US.

I've been to Singapore plenty of times and seeing many many many ships 'parked' off the coast near Singapore is a very usual sight.

Just Google it: https://www.google.com/search?q=ships+off+coast+singapore&newwindow=1&bi...

Go ahead again with the usual minuses...yawn.

BuddyEffed's picture

And having full stockpiles gives the tribe more options in handling the crises. It's gods work.

froze25's picture

When Cushing is full and they refuse a delivery that is when the SHTF, not until that is a headline.

Theosebes Goodfellow's picture

You gotta' ask yourself though, where the hell is Godzilla when you need him? I mean, think of the explosions, think of the fires, the mayhem, the devastation! Godzilla, where are you!?!?!

Boris Alatovkrap's picture

Summarize by graphical representation without careful analysis, Boris is summize acute infestation of small red dot is stunning something.

weburke's picture

ready for war disruption, but early

AbbeBrel's picture

quote on "true price" per gallon of gas, and barrel of oil:

"To produce the same energy as that in a gallon of gasoline, 33 kilowatt-hours, Jim would need to pedal 33 X 10 = 330 hours. We need to be legal, of course, so Jim only pedals 40 hours per week. Jim’s desperate, so let’s assume he agrees to take no breaks and never stops working to chat at the water cooler or to check in with his friends on Facebook. He pedals straight through for 40 hours per week. He will have pedaled enough to equal the energy in a gallon of gasoline in a little more than eight weeks. Because Jim’s desperate, he gladly works for minimum wage, so your energy equivalent of a gallon of gasoline is a bargain at $6.55 X 330 = $2,194. How’s the price of gasoline lookin’?"

http://letthesunwork.com/energy/barrelofenergy.htm

and to close:

"You’ll never remember $2,194 or $109,169. We sure don’t. Cheat down. Remember $2,000 per gallon of gas and $100,000 per barrel of oil. Those you can remember."

AVmaster's picture

When I was in the Navy back in 00-04 we went thru the strait plenty of times and there was always a button of ships in there so I'm not so sure what this is all about...

cheka's picture

the galveston article was b.s.

suspect same for this

if author wants to prove it - show empty docks, not ships waiting to dock

offshore of ports = the parking lot for ships that have business at the port(s)

Scuba Steve's picture

Lets not get stupid here:

Jim will not be Obese, he will have saved from ending up in FSA and costing taxpayers.

American engenuity would have him peddling a bigger wheel to cut the reps needed, saving money.

Jim would contract most of the peddling out to a sub-contractor, Jims out on the deck at home sipping a doseki most hours of the day.

jeff montanye's picture

that and the wind blows up and down and across the great plains of the u.s. and canada whether or not there are any windmills there to turn it into electricity.  ditto on sunshine in the southwest u.s. and much of mexico (not to mention the empty quarter of saudi arabia, the roofs of new buildings, etc.).

considering the rising curve of battery efficiency and other strategems to store energy, the mdb comment above, while always insufferable in tone, makes more points that i agree with than perhaps ever before.

K_BX's picture

Great calculation - it shows the value of oil. Nevertheless it is still a ressource - you will see demand destruction, before someone pays 100k/barrel. Or to put it another way - without afordable oil the economy will be set back to the beginning of the 20th century.

armageddon addahere's picture

More like the mid 19th century, and then only if we can get the whale oil and coal like they used back then.

SMG's picture

If they can get this to work:

https://en.wikipedia.org/wiki/High_beta_fusion_reactor

It really would make a better world.  This would be the way to go.  There's just not enough solar/wind that is consistant to make the world go around.

A Pimp's love is different's picture

Naturally, it's those evil 'LUCIFERIANS', 'GLOBALISTS' that are blocking the solar winds...

 

What the world needs is an ANTI SOLAR WIND BLOCKING ANTI DEFAMATION SOCIETY to affix & redirect the correct & proper blame on the matter...

bid the soldiers shoot's picture

How about a 8.7 earthquake off the east coast of Pulau Pedang sending a 47 foot high tsunami through the Singapore Strait?

 

just sayin

Leopold B. Scotch's picture

MDB always reliable with the satire.

As for the tankers, not the driver.   China's massive consumption is, and the fact that China is choking on overcapacity and capital flight is.  The tankers could be resolved  in short order with a blip  up of demand, but when china's inevitable credit-induced, centrally-planned accidental collapse rounds the bend, then we'll see what matters in oil.

D Nyle's picture

MDB showed up when most of ZH was in group think doom mode, his satire was the needed break from the group think. We don't have that problem as much anymore but he is the first at ZH satire and still the best so i always upvote him

Implied Violins's picture

I used to do that, but I have seemingly lost the ability to laugh so now I just downvote him without reading. His work is too stunningly close to MSM groupthink for me to appreciate any more, because for the EBT crowd, it isn't satire but fact. Which just makes me sadder.

BarkingCat's picture

I don't  think it is the same MDB.

The quality does not seem to be the same.

I don't even bother reading it anymore, nor voting it up or down.

 

ebear's picture

"I've been to Singapore plenty of times and seeing many many many ships 'parked' off the coast near Singapore is a very usual sight."

That's true, and those ships are of various types, as you can see from the photo link you posted.

However....

"I've been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,"

Tankers. Not ships. Tankers, which are easy to spot from the air.

Just to be clear, the guy was talking about TANKERS, not ships in general.

HTH

roddy6667's picture

I live in Qingdao, a large Chinese port city. Crude is offloaded here, into a pipeline that goes to a refinery more than 100 miles inland. There are many ships waiting to unload. Of course, there are always at least 50 ships waiting. Some of them are just leaving. That's what a port city looks like. How many are full oil tankers? I can't tell from land.

runningman18's picture

If an oil tanker is sitting idle for more than a few days then it is probably full and waiting to offload. The longer they sit idle the less runs they make and the less money they make on new contracts. Most of these tankers around the world are sitting idle for weeks at a time. Sorry, but this is a shit storm and no one wants to admit it.

MasterControl's picture

You must be referring to the Alinsky tribe.

Bokkenrijder's picture

Seeing anchored ships off the coast in Singapore is nothing unusual, just Google it: https://www.google.com/search?q=ships+off+coast+singapore&newwindow=1&bi...

runningman18's picture

We're talking about oil tankers, not ships in general, moron.

BorisTheBlade's picture

See, my dear boy, the infographics. They make the world visible in a way you'd never seen it before. /s/ an ugly anger's brother

jpintx's picture

You are correct.  Most folks do not comprehend the scale of the industry.  Who knows yet if it will become a trend, but Y-O-Y four week moving average demand for gasoline in the USA has increased 500MBD at the same time domestic crude production on the same metric has declined by 500MBD, see here.....http://ir.eia.gov/wpsr/overview.pdf

flaminratzazz's picture

The obvious solution is to empty all the idled tankers into the ocean and go get another load, rinse repeat.

Kirk2NCC1701's picture

Given the water quality around Singapore, "what difference does it make", if they dump the oil into the water?

;-)

palmereldritch's picture

Global Warming?

Get with it. It's called Climate Chains now

tricorn teacup's picture

Climate =Chains= is a fitting term for the scam.

cheech_wizard's picture

I'd pay good money not to have to read even one more of your postings. 

Eliminate MDB by 2017!

Standard Disclaimer: A far more reasonable timeline if you ask me.

The Saint's picture
The Saint (not verified) cheech_wizard May 20, 2016 12:05 PM

SOLUTION: Down Vote MDB at first glance and move on.  Read the first sentence if you could use a good laugh.  Then move on.

Ward no. 6's picture

too true

i don't even bother reading his stuff, why?

it is funny how so many ppl get carried away on his comments

BorisTheBlade's picture

With all due respect, I disagree. You can trust MDB in the same way you trust a second derivative of a function, if you hear him pronouncing peak oil dead, you can bet your nuts peak oil is getting back on its feet, because MDB just called local maximum of a 'peak oil death function'. Worship MDB and study calculus.

Reichstag Fire Dept.'s picture

Let's power the world on hopium! :)

armageddon addahere's picture

You don't have to read his posts. It is not mandatory to read every post on here. I skip everything by MDB and Boris A lot of crap and a few others. This makes them only mildly annoying, and if you don't find ZH at least mildly annoying you are missing the point.

Yukon Cornholius's picture

Green energy is not the answer. Thorium and LFTR technology is the answer to the world's energy problems. Too bad the chinks have a big lead on the patents.

techpriest's picture

Green energy is good if you live in a place where power lines are hard to come by. Otherwise, I agree that LFTR is the way ahead on grid power.